Freddie Mac Adjustable Rate Mortgage
by Ellise Walsh

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; ensuring 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.

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