Differences between fixed and adjustable rate loans
With a fixed-rate loan, your monthly payment never changes for the life of your loan. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance will increase over time, but in general, payment amounts on these types of 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. As you pay on the loan, more of your payment is applied to principal.
You might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose these types of loans when interest rates are low and they wish to lock in the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide 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, as we called them above — come in a great number of varieties. Generally, the interest on ARMs are determined by a federal index. A few of these are: the 6-month 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 are capped, which means they won't go up above a specified amount in a given period. Some ARMs can't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that ensures that your payment will not go above a fixed amount over the course of a given year. Plus, almost all adjustable programs feature a "lifetime cap" — this cap means that the rate can't go over the capped percentage.
ARMs most often feature their lowest rates at the beginning of the loan. They provide that rate from a month to ten years. 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 3 or 5 years, then they adjust. These loans are usually best for people who anticipate moving in three or five years. These types of adjustable rate loans most benefit borrowers who will move before the loan adjusts.
Most borrowers who choose ARMs do so when they want to get lower introductory rates and don't plan to stay in the house longer than the introductory low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up when they can't sell or refinance with a lower property value.
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!