Differences between fixed and adjustable loans
With a fixed-rate loan, your payment never changes for the entire duration of the loan. The amount that goes for your principal (the loan amount) goes up, however, the amount you pay in interest will go down accordingly. The property taxes and homeowners insurance will go up over time, but generally, payments on fixed rate loans change little over the life of the loan.
Your first few years of payments on a fixed-rate loan go mostly to pay interest. That reverses as the loan ages.
Borrowers can choose a fixed-rate loan to lock in a low interest rate. People select fixed-rate loans because interest rates are low and they want to lock in this lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at the best rate currently available. Call Tenby J. Dahman at 3038627760 to discuss your situation with one of our professionals.
Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, the interest on ARMs are determined by 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, which means they can't increase above a specific amount in a given period of time. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount your monthly payment can go up in a given period. Almost all ARMs also cap your rate over the duration of the loan.
ARMs most often have the lowest, most attractive rates toward the start. They provide that interest rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for a certain number of years (3 or 5), then adjust after the initial period. Loans like this are often best for borrowers who anticipate moving in three or five years. These types of adjustable rate programs are best for people who plan to sell their house or refinance before the initial lock expires.
You might choose an Adjustable Rate Mortgage to get a very low initial rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates when they can't sell their home or refinance at the lower property value.
Have questions about mortgage loans? Call us at 3038627760. We answer questions about different types of loans every day.