ARM vs Fixed Rate Mortgage For A Doctor

What Is An ARM Loan?

An ARM loan is also known as a variable rate mortgage, is a mortgage that begins as a fixed rate for a set period. However, with ARM loans, the rate begins to adjust after the set period, usually three, five, seven, 10, and now 15 years. The adjustment of the ARM is based on market indexes and will typically adjust one a year after the fixed period. One key benefit of an ARM loan is that your initial rate is traditionally lower than that of a Fixed rate so you can save in the short term on your monthly payment. Another benefit of an ARM loan is that it allows a cheaper way for doctors who don’t plan or living in one location for very long to purchase a home and acquire real estate. Key disadvantages of an ARM loan are that the first adjustment after the set fixed period can be quite steep given the market indexes at that time. Most ARM loans have caps that the rate cannot adjust over the adjustment period or life of the loan. This alone does not make the risk of an ARM loan any less and leads to another disadvantage of an ARM loan. Arm loan rates and monthly payments can rise significantly over the life of the loan if you retain for the entire term, typically 30 years. A 3% ARM could become 8% or more eroding the savings your recouped during the initial fixed rate.

Fixed Rate Mortgage

This brings us to a Fixed rate mortgage. Fixed rate mortgages are easy to understand. The rate on a fixed rate mortgage will remain constant for the entirety of the loan typically 10, 15, 20, or 30 years. The simplicity of a fixed rate leads many doctors to believe that this is the best fit for them in the short and long term, but disadvantages also exist with a fixed rate that often go overlooked. One key disadvantage to fixed rates is that if rates do indeed lower over time, the only way to take advantage of the savings offered by the new rates is to refinance. This means another loan process is required with an additional set of closing costs. This can be costly and eat into the principle of your loan effectively extended the loan period. Another disadvantage to fixed rates is that although the rate remains the same for the entirety of the loan term, the rates tend to be higher and will impact your overall qualifying for homes that might be desirable.   Even with these disadvantages however, a fixed rate mortgage offers financial stability when budgeting your biggest monthly expense. This alone offers a sense of relief when economic conditions are questionable. Also, as mentioned earlier, fixes rate mortgages are simple to understand and allow you to set it and forget it. With an ARM loan, you will have to execute a strategy to either refinance, sell, or retain your rate and make corresponding financial decisions to keep your budget in check.

Final Closing Disclosure

Although you will have many other loan disclosures that required your signatures including the Loan Estimate, the Final Closing Disclosure is by far the most important disclosure you are presented with because it will have your final loan terms, payment, and fees. To define the Closing Disclosure more specifically, your CD or Closing disclosure is a five-page form that provides final details about your mortgage loan. Also, the closing disclosure starts the clock from which you can sign your loan documents and fund your home loan. Because of this, your lender is required to give you the Closing Disclosure at least three business days before you close on your mortgage loan. This three-day window allows you to confirm your final loan terms and costs with that of your loan estimate. If you notice any significate discrepancies, the three-day window allows time for your lender to fix and remedy any issues.

The Decision Is Yours…

The decision between a fixed and ARM loan is not a straightforward one but with resources online including financial calculators and amortization schedule you can plan efficiently. Additionally, if one is available, seeking advice from a financial adviser or CPA is always a safe bet because of their arm’s length from the transaction. Here are some key questions you want to ask when deciding between an ARM or Fixed rate mortgage: 1. How long do I plan on living in the home? How often does the ARM loan adjust and when is the adjustment made? 3. What is the interest rates market currently and where is the market heading? Could I still afford my payments if rates rise? Answers to these questions can help you identify which loan options is best for you but always check rates and shop your loan with multiple lenders. This will allow you to make a sound financial decision for you and your family.

Discover The Perfect Physician Loan For You