Adjustable versus fixed rate loans
With a fixed-rate loan, your payment remains the same for the life of your mortgage. The amount allocated to your principal (the actual loan amount) goes up, but your interest payment will decrease accordingly. The property tax and homeowners insurance will increase over time, but generally, payment amounts on fixed rate loans don't increase much.
Your first few years of payments on a fixed-rate loan go mostly toward interest. The amount paid toward your principal amount goes up slowly each month.
Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. People choose fixed-rate loans when interest rates are low and they wish to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at a favorable rate. Call Executive Lending Group at 4056158543 to learn more.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. Generally, the interest rates for ARMs are determined by a federal index. A few of these are: the 6-month CD rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most ARM programs feature a cap that protects borrowers from sudden monthly payment increases. Some ARMs won't increase more than two percent per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that the payment can go up in a given period. The majority of ARMs also cap your rate over the life of the loan period.
ARMs most often have the lowest, most attractive rates at the beginning of the loan. They usually guarantee 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 initial rate is fixed for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then adjust. These loans are best for borrowers who expect to move within three or five years. These types of adjustable rate loans benefit borrowers who will move before the loan adjusts.
You might choose an ARM to take advantage of a lower initial rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs are risky when property values decrease and borrowers cannot sell their home or refinance.
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!