Freddie Mac™ ARM And Fixed
Author: Ryann Cairns
In 1970, the U.S. Congress created Freddie Mac as a solution to the numerous housing problems the nation had been facing for the last decade. During that time it had become harder than ever for consumers to get a mortgage loan, due to the lack of available funds and when a consumer was fortunate to get a loan they were often subject to unpredictable and escalated interest rates.
America’s families were in a dire housing crises and needed help. That assistance came in the form of numerous agencies which were created to form the secondary mortgage market. The Federal Reserve had taken on the task of restricting the amount of money that banks were allowed to make available for mortgage loans in hopes that this would control the volatile economy; however that left prospective homebuyers in a predicament.
The secondary mortgage market made it possible for loans to be sold to the new agencies chartered by Congress, freeing up funds for additional mortgage loans while still allowing the banks to stay in compliance with the money reserves set by the Federal Reserve. After 35 years, this process has proven to be immensely successful.
Although the economy, and interest rates, are not quite as volatile as they were during the Sixties and Seventies, banks still find it quite beneficial to be able to sell mortgages to agencies like Freddie Mac once they have been approved and originated. The consumer rarely sees a difference, as the original lender generally continues to service the loan. In some cases, Freddie Mac keeps a small number of purchased mortgage loans within their own portfolio; however usually they resell the bulk of mortgage loans to investors from around the world.
This insures a steady flow of available mortgage funds to all consumers and maintains Federal Reserve funds. In some cases, a consumer may not even be aware that their mortgage loan will eventually be sold to Freddie Mac and finally to worldwide investors. Whether that loan will be resold or not, it is important that future homeowners give some thought to the type of mortgage loan that will best suit there desires and interests.
The fixed rate mortgage loan is extremely popular because it locks in the current interest rate for the duration of the loan. Consumers who fear the interest rate market may spike sometime during the term of their mortgage can rest assured that they will never have to face a raised mortgage payment. In this sense, a fixed rate mortgage loan can provide a tremendous amount of security.
One of the major advantages to this type of loan is that consumers will always know the amount they are responsible for paying on their monthly mortgage payments. Even if costs of other services and items rise due to inflation, the monthly mortgage payment will always remain the same. First time home buyers are usually very attracted to the fact that they can plan for the future based on the security and low risk factors of a fixed rate mortgage loan.
While a fixed rate mortgage loan provides absolute security from hiked interest rates, there is the alternate fact which must be taken into consideration. The consumer will be exempt from raised interest rates with a fixed rate loan but they will also be restricted from lower interest rates. Should the prime market interest rate decrease at any time during the term of the consumer’s loan, the consumer will be locked into the higher interest rate. This means that although the consumer’s monthly mortgage payment could be reduced with a lower rate and they could actually shave some time off the term of their loan, there will be precious few options available to them due to the fact that they locked in the higher rate when they originated their home mortgage loan.
There is also the fact that consumers may not be able to qualify for large of a mortgage loan with a fixed rate mortgage; which means they may have to either make a larger down payment or settle for a more modest or smaller home. In some cases, the consumer may have the option of refinancing later on; however there are generally several restrictions and requirements that govern the possibility of refinancing the mortgage loan. Consumers should give careful consideration to the advantages and disadvantages of a fixed rate loan as well as an adjustable rate loan before signing on the dotted line.
Freddie Mac is one of the agencies that comprise the secondary mortgage market. As such, Freddie Mac purchases both single family and multi-family residential mortgages from primary mortgage market lenders. Freddie Mac has actually been around since the 1970’s as an answer to a difficult housing situation that arose in the Sixties, when interest rates tended to be unpredictable and it became increasingly difficult for consumers to obtain affordable mortgage loans.
While Freddie Mac has been around some 35 years, it has really only been in the last few years that consumers have actually become more aware of the important role that Freddie Mac can play in their lives when they make the decision to purchase a home. Sometime after the consumer has been approved for the loan and it has been originated, the lender will sell the mortgage loan to Freddie Mac in order to free up funds to help other consumers purchase homes. Freddie Mac then packages that loan, along with others, into securities than can be sold to investors. In many cases, these investors may come from all over the world.
While the whole process may sound a bit complicated, in the end it allows consumers to have continuous access to mortgage funds and lenders to be able to stay with Federal Reserve guidelines regarding the amount of money they have available for loan to consumers at any given time. A homeowner begins the process by applying for a conventional mortgage loan from a lender or mortgage company. At the time that they make the application for the mortgage loan, the consumer will need to give some thought to what type of mortgage loan they are interested in.
This goes much farther than considering the length of the loan they would prefer. Consumers may select either an adjustable or fixed interest rate loan and it is imperative that consumers full recognize the significance of each type of mortgage loan. By and large, a fixed rate mortgage loan is chosen by more consumers than any other type of loan. It is so common; in fact, that many consumers may not realize there is any other kind of mortgage loan.
While a fixed rate mortgage loan is quite popular, there are definite advantages to considering an adjustable interest rate loan. Adjustable rate mortgages, also known as ARM’s, can give the homeowner the benefit of starting off their mortgage with a low interest rate; sometimes lower than may be offered with a fixed rate mortgage loan. The lower interest rate translates to a lower monthly mortgage payment. Naturally, this is a definite advantage.
The one fact about adjustable interest rate mortgages that consumers should be aware of, however; is that the low interest rate can change during the term of the loan. When and how often the interest rate changes is determined by the adjustment periods of the loan. Consumers should pay very close attention to the adjustment period of the loan and make sure they fully understand the implications. Adjustment periods of ARM’s tend to vary greatly.
One adjustable rate mortgage may stipulate that the interest rate cannot change for several years while another may only restrict the change to a matter of months. Regardless of the length of the restriction period on interest rate changes, after that time period expires the loan is subject to the fluctuations of the primary interest rate market. In some cases, the interest rate on the loan may change each and every year for the remainder of the loan. The change may result in a higher interest rate or a lower interest rate.
Generally, the loan will come with what is known as a lifetime cap-this means that the loan can never exceed the amount of the cap. Consumers who are interested in an adjustable interest rate mortgage should learn how to read the numbering system commonly used on ARM documents. For example, a loan that is 5/1 means that the interest rate cannot change for the first five years but will become subject to changes each year following that initial five year period.
With a lower interest rate and higher mortgage qualification period adjustable interest rate mortgages can be extremely appealing to consumers but they should also keep in mind that although their interest rate and mortgage payment may start out low, they may also end up higher by the end of the loan. Whether an initial lower interest rate is worth the risk of eventual higher payments is a decision the consumer will need to make.