Real Estate and Financing Options Essay

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30-Year Fixed Mortgage and a 5/1 Arm

There are many different types of mortgage loans available on the market. One of the most traditional is clearly the 30-year fixed mortgage; however, lenders provide other packages to suit the needs of other types of house buyers based on their long or short-term view. This paper will compare two types of mortgage loans -- a 30-year fixed and 5/1 Arm (a loan with the rate locked for the first five years but can only increase 1% with each subsequent year should rates rise). The reader will be able to understand the pros and cons of each type of loan package.

Scenario -- 6819 S. 42nd Lane, Phoenix, AZ (MLS# 4595517)

The house that we will use to conduct our comparative analysis is MLS # 4595517 (the link is http://www.realtor.com/realestateandhomes-detail/6819-S-42nd-Ln_Phoenix_AZ_

85041_M21586-12497) with the asking price of $169,999. Assuming a 20% down payment and funds to cover closing costs, the loan amount is $135,999.

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20. For illustrative purposes, we do not make any considerations regarding points, discounts or broker fees. Using the rates at Bankrate.com (retrieved June 16, 2011), a 30-year fixed is averaged at 4.5%. A 5/1 Arm is averaged at 3.04%. Using an amortization schedule, our mortgage payments on a 30-year fixed is $689.09 a month while on a 5/1 Arm, the payments are $576.32, already a savings of $112.77 per month on the mortgage. Over the first 60 months, the home buyer will save $6,766.20 versus purchasing the house with a 30-year fixed loan.

However, we have to ask the question, "What's the risk?" The 5/1 Arm, as stated earlier, is locked at the interest rate at 3.04% for the first five years, however, should rates rise, it can go up as much as 1% each year thereafter. To illustrate, consider the table below on the….....

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