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The New Climate for Mortgage Borrowers

If You're Looking for a New Mortgage or to Refinance

Compare fixed-rate and adjustable-rate loans, even if ARMs carry a lower initial interest rate. With a fixed-rate mortgage, you pay the lender the same, fixed interest rate over the life of the loan, which usually will be 30 years but could be 15 or 20 years. With an adjustable-rate loan, your interest rate may be fixed for a certain time period but later will periodically rise or fall based on a market index. Although early payments at "teaser rates" may be lower with an ARM, the interest costs later on can go up significantly. "Frequently, the fixed-rate loan is cheaper and safer in the long run," said Janet Kincaid, FDIC Senior Consumer Affairs Officer.

Also carefully evaluate your ability to make payments throughout the life of a loan. "The mortgage loan originator should conduct a realistic assessment of your ability to repay, especially with an ARM, including the highest possible payment under the terms of the loan," said Victoria Pawelski, an FDIC Policy Analyst. "An unrealistic assessment based on a low, introductory payment can lead to payment shock and, for some people, a very costly foreclosure."

Start by asking for a side-by-side comparison of what you would pay each month with both fixed- and adjustable-rate mortgages and assuming that the ARM's interest rates will rise to their maximum levels. You'll most likely see that after, say, three years, the ARM could start costing more than the fixed-rate option, and eventually could be far more expensive.

Real estate taxes and insurance can add significantly to your monthly payments, and they are likely to rise in the future, so also include those costs in your review. (Even though a lender may not require escrow payments for taxes and insurance as part of your mortgage, it's important to factor those costs into your comparison.) Include any fees you would owe the lender and other service providers. Also find out if there will be prepayment penalties for paying off the loan early, because these can be very costly if you want to refinance or sell your home.

If you decide to go with an ARM, one way to protect against rising interest rates in the future is to add a "conversion option" that would allow you to switch to a fixed-rate mortgage in the future, for a set fee.

FDIC Consumer News is published by the Federal Deposit Insurance Corporation

FDIC Consumer News is produced quarterly by the FDIC Office of Public Affairs in cooperation with other Divisions and Offices. It is intended to present information in a nontechnical way and is not intended to be a legal interpretation of FDIC or other government regulations and policies. Mention of a product, service or company does not constitute an endorsement.

Find current and past issues of FDIC Consumer News at http://www.fdic.gov/consumernews. Refer to this same index to locate the issues that are specially formatted for being reprinted in any quantity.

To receive an e-mail notice about each new issue of FDIC Consumer News posted on the FDIC Web site, with links to stories, follow instructions posted at www.fdic.gov/about/subscriptions/index.html.

Last updated on 11/08/2007

Make the correct decisions when shopping for banking, debt consolidation and related financial services. Educate yourself!

The Debt Consolidation Loan Directory has a growing library of free informative / educational financial resources for consumers shopping for many types of services related to the management of your money, such as consolidating credit card debts, fraud alerts and car insurance. There is no better way to make decisions regarding the management of your personal finances than to read and understand how they work. Please feel free to visit our consumer resource library for more information.

• Cell Phone Banking - New cell phones are constantly evolving and becoming more sophisticated. This includes adding the capability of handling online banking through your phone. This FDIC article discusses some of the possibilities and precautions you should take when using your phone for banking purposes.
• How to Protect Yourself with FDIC Insurance - Read up on what qualifications are necessary and how to determine if your deposits are covered by FDIC insurance.
• Direct Deposit Safer than Checks? - The US Treasury Department reports that a majority of surveyed consumers mistakenly believe that paper checks are safer than direct deposit.
• Consider the Fees! - Learn what to look for and examine the details of each banking account offer for possible fees, such as: inactivity, minimum balance and ATM withdrawal fees.

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