Conventional financing is back in style

By Lisa Scontras
Custom Publishing Group

“The attraction is the payments never go up,” says Carol Marx, vice president and manager of the Mortgage Banking Department at First Hawaiian Bank. “For the buyer who, for budgeting purposes, wants to know that their rate and their payment is going to be the same, the 30-year fixed rate mortgage is amortized over 30 years. The payments will remain unaffected by interest-rate increases.”

Compared to adjustable-rate mortgages — or ARMs — that start out at a fixed rate for the first couple of years but then adjust as the market rates fluctuate, the 30-year mortgages are fixed for the entire term. And because ARMs go up if the going rates go up — sometimes as much as 2 percent per year — the payments can increase to a point where it may make sense to look at converting to a fixed-rate product.

“If you know you’re only going to be in the property for a couple of years, the ARMs may be a good way to go,” says Marx. “But for the person who wants to be sure they know exactly what their payments are going to be every month, who doesn’t want the risk of annual increases, the fixed rate is better — particularly when interest rates are still so historically low.”

Marx adds that fixed-rate loans have some options that are making it the loan of choice once again for many homebuyers.

“We have zero-down programs with less restrictions, 40-year mortgages, and we’re seeing a resurgence of the buy-down loan,” she says. “At First Hawaiian Bank, we’re offering a 30-year, fixed-rate loan that you can buy down to 5.99 percent for the first year.”

Because of the risk associated with adjustable-rate loans and interest-only mortgages, programs such as the 40-year terms will allow many the chance to own what they previously could not afford. By lengthening the amortization schedule, the monthly payment will decrease making it easier to qualify. The interest rate is higher just as, conversely, it is lower on a 15-year mortgage, Marx says.

The buy-down gives borrowers the chance to prepay fees to buy a lower interest rate for the first year. Similar to the ARMs and the interest-only products, the benefit is the monthly payments are lower for that first year.

Since the one disadvantage of the fixed-rate mortgages is the generally higher interest rate than the adjustable-rate products, the buy-down is an option intended to offset that with a lower rate initially.

Marx says that 70 percent of the borrowers today are opting for fixed rate loans.

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