Differences between adjustable and fixed loans
With a fixed-rate loan, your monthly payment doesn't change for the life of the loan. The amount of the payment allocated to your principal (the amount you borrowed) goes up, but your interest payment will go down in the same amount. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally payment amounts on your fixed-rate mortgage will be very stable.
Your first few years of payments on a fixed-rate loan go mostly to pay interest. As you pay , more of your payment is applied to principal.
You can choose a fixed-rate loan in order to lock in a low rate. Borrowers select these types of loans because interest rates are low and they wish to lock in at this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at a favorable rate. Call Tenby J. Dahman at 3038627760 for details.
Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, the interest rates for ARMs are based on an outside index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
The majority of ARMs feature this cap, so they can't increase over a specific amount in a given period. Some ARMs can't increase more than two percent per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that the payment can go up in one period. Additionally, the great majority of ARMs have a "lifetime cap" — this cap means that the rate will never go over the cap percentage.
ARMs usually start at a very low rate that usually increases over time. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is set for three or five years. It then adjusts every year. These types of loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are usually best for borrowers who anticipate moving in three or five years. These types of ARMs are best for borrowers who will move before the loan adjusts.
You might choose an ARM to take advantage of a lower initial rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. ARMs can be risky if property values decrease and borrowers are unable to sell or refinance.
Have questions about mortgage loans? Call us at 3038627760. We answer questions about different types of loans every day.