Fixed versus adjustable loans
With a fixed-rate loan, your monthly payment doesn't change for the life of your mortgage. The amount of the payment allocated for principal (the amount you borrowed) will increase, however, the amount you pay in interest will go down in the same amount. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but for the most part, payments on fixed rate loans don't increase much.
Your first few years of payments on a fixed-rate loan are applied mostly toward interest. That gradually reverses itself as the loan ages.
Borrowers might choose a fixed-rate loan in order to lock in a low rate. People choose fixed-rate loans because interest rates are low and they wish to lock in at this lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at a good rate. Call Executive Lending Group at 4056158543 for details.
There are many different kinds of Adjustable Rate Mortgages. Generally, the interest on ARMs are based on 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.
The majority of Adjustable Rate Mortgages are capped, which means they won't increase above a specific amount in a given period of time. There may be a cap on how much your interest rate can go up in one period. For example: no more than two percent a year, even though the underlying index goes up by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount the payment can go up in a given period. Plus, almost all ARM programs feature a "lifetime cap" — the rate can't ever exceed the cap percentage.
ARMs usually start at a very low rate that usually increases as the loan ages. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These loans are fixed for a certain number of years (3 or 5), then they adjust after the initial period. Loans like this are often best for people who anticipate moving in three or five years. These types of ARMs most benefit borrowers who will move before the loan adjusts.
You might choose an ARM to get a lower initial interest rate and count on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs are risky when property values decrease and borrowers are unable to sell or refinance their loan.
Have questions about mortgage loans? Call us at 4056158543. We answer questions about different types of loans every day.