Differences between fixed and adjustable rate loans
A fixed-rate loan features the same payment for the entire duration of your mortgage. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part monthly payments on a fixed-rate mortgage will increase very little.
At the beginning of a a fixed-rate loan, most of your payment goes toward interest. The amount applied to principal goes up slowly every month.
Borrowers can choose a fixed-rate loan to lock in a low interest rate. People select fixed-rate loans when 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 provide more 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 favorable rate. Call Dick Lepre NMLS #302379 at 4152449383 for details.
There are many types of Adjustable Rate Mortgages. Generally, interest for ARMs are based on an outside index. Some examples of outside indexes are: the 6-month CD rate, the 1 year Treasury Security rate, 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 monthly payment increases. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than a couple percent per year, even if the underlying index increases by more than two percent. Sometimes an ARM features a "payment cap" which guarantees that your payment can't increase beyond a certain amount over the course of a given year. In addition, almost all ARMs have a "lifetime cap" — this means that your rate won't go over the capped amount.
ARMs usually start out at a very low rate that usually increases as the loan ages. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is fixed for three or five years. It then adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust. Loans like this are best for borrowers who anticipate moving within three or five years. These types of adjustable rate loans benefit borrowers who plan to move before the loan adjusts.
You might choose an ARM to take advantage of 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 rates that go up when they can't sell their home or refinance with a lower property value.
Have questions about mortgage loans? Call us at 4152449383. It's our job to answer these questions and many others, so we're happy to help!