Adjustable versus fixed rate loans
With a fixed-rate loan, your payment stays the same for the entire duration of the mortgage. The longer you pay, the more of your payment goes toward principal. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally payment amounts on a fixed-rate loan will increase very little.
Your first few years of payments on a fixed-rate loan are applied mostly toward interest. The amount paid toward your principal amount goes up gradually each month.
Borrowers can choose a fixed-rate loan to lock in a low rate. Borrowers select these types of loans because interest rates are low and they wish to lock in at the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at a good rate. Call Tenby J. Dahman at 3038627760 to learn more.
Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. Generally, interest rates on ARMs are based on a federal index. A few of these are: the 6-month CD rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most programs feature a "cap" that protects borrowers from sudden increases in monthly payments. Some ARMs won't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that guarantees that your payment can't increase beyond a certain amount over the course of a given year. Almost all ARMs also cap your interest rate over the life of the loan period.
ARMs usually start out at a very low rate that may increase as the loan ages. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the initial rate is fixed for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are best for borrowers who anticipate moving within three or five years. These types of adjustable rate loans most benefit people who will move before the initial lock expires.
You might choose an Adjustable Rate Mortgage to get a very low introductory rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs are risky if property values go down and borrowers can't sell or refinance.
Have questions about mortgage loans? Call us at 3038627760. It's our job to answer these questions and many others, so we're happy to help!