The short answer is that fixed rate mortgages are not harder to qualify for than adjustable rate mortgages (ARMs). For both types of financing, you have to jump through all the same hoops and meet all the same standards. So why do ARMs seem more accessible? It all comes down to the affordability of the monthly payment.
When you are working with a mortgage lender to secure a home loan, one of the most essential pieces of information that you'll be given is how much you are qualified to borrow. And that number will be driven in part by the interest rates available to you. Because ARMs tend to have lower initial interest rates than fixed rate mortgages, the initial monthly payments can also be lower. Depending on the terms of the loan, that lower monthly payment may very well allow you to qualify for a larger mortgage than what you could get under the terms of a 30-year fixed rate note.
For example, let's say that you've qualified for a $200,000 30-year fixed rate mortgage at 4.0%. That means your lender has determined that you should be able to afford monthly principle and interest payments of $954.83. In a similar interest rate environment, however, you may be able to opt instead for a 5/1 ARM at 2.75%. At that rate, your monthly payments drop to $816.48, which means that you might be able to qualify for as much as $230,000.
Sounds great, but let the buyer beware. Will you still be able to afford your mortgage payments when interest rates go up? If not, will you be able to refinance at an acceptable rate? And if you can't do that, will you be able to sell your house before you fall behind on your payments? The risks inherent to an ARM are too rich for many buyers. On the other hand, if you're planning on keeping the house for only a few years, the low initial rates of an ARM might work to your advantage.
For long-term stability especially when interest rates are low most mortgage experts recommend the fixed rate mortgage. Recently, interest rates on 30-year fixed-rate mortgages have been hovering just above 4%. Although that represents a slight uptick from last year's all-time low of 3.35%, it's still a terrific bargain from a historical perspective. Anyone who has recently paid off a 30-year note might remember the dark days of the 1980s, when mortgage rates soared as high as 18.45%.
If you've qualified for an ARM but not a fixed rate mortgage, you may want to shop around for other programs. It could be that you're on the cusp of qualifying for that fixed-rate loan, and you may find a lender who can accommodate you. With rates where they are right now, it would likely be worth the effort.
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