Fixed versus adjustable loans
A fixed-rate loan features a fixed payment amount over the life of the mortgage. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally payments on a fixed-rate loan will increase very little.
When you first take out a fixed-rate mortgage loan, most of your payment goes toward interest. This proportion reverses as the loan ages.
Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select fixed-rate loans when interest rates are low and they want to lock in this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer 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 good rate. Call Executive Lending Group at 4056158543 to learn more.
There are many types of Adjustable Rate Mortgages. Generally, 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.
Most ARM programs have a "cap" that protects you from sudden increases in monthly payments. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than two percent per year, even if the underlying index increases by more than two percent. Sometimes an ARM features a "payment cap" that guarantees your payment will not go above a certain amount in a given year. Plus, almost all adjustable programs feature a "lifetime cap" — the interest rate can't ever exceed the cap amount.
ARMs usually start out at a very low rate that may increase over time. You've likely read about 5/1 or 3/1 ARMs. For these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These types of loans are fixed for a number of years (3 or 5), then they adjust after the initial period. These loans are often best for people who expect to move within three or five years. These types of adjustable rate loans most benefit people who plan to move before the loan adjusts.
Most people who choose ARMs choose them because they want to get lower introductory rates and do not plan on remaining in the house for any longer than the initial low-rate period. ARMs are risky if property values decrease and borrowers can't sell their home or refinance their loan.
Have questions about mortgage loans? Call us at 4056158543. It's our job to answer these questions and many others, so we're happy to help!