Fixed versus adjustable rate loans
A fixed-rate loan features a fixed payment amount over the life of your mortgage. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally monthly payments on a fixed-rate mortgage will increase very little.
Your first few years of payments on a fixed-rate loan are applied mostly to pay interest. This proportion reverses itself as the loan ages.
You might choose a fixed-rate loan to lock in a low rate. People choose these types of loans when interest rates are low and they want to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at the best rate currently available. Call Executive Lending Group at 4056158543 for details.
There are many different types of Adjustable Rate Mortgages. Generally, interest rates 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 Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most Adjustable Rate Mortgages are capped, which means they can't go up above a specific amount in a given period. Some ARMs won't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which guarantees that your payment won't increase beyond a certain amount over the course of a given year. In addition, almost all ARM programs have a "lifetime cap" — this cap means that the rate can never go over the capped amount.
ARMs most often feature their lowest, most attractive rates at the beginning. They guarantee the lower rate for an initial period that varies greatly. You've likely read about 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust. These loans are often best for people who expect to move in three or five years. These types of adjustable rate programs benefit people who will sell their house or refinance before the loan adjusts.
Most people who choose ARMs choose them because they want to get lower introductory rates and do not plan to remain in the house longer than this introductory low-rate period. ARMs are risky if property values go down 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!