Differences between fixed and adjustable loans
A fixed-rate loan features the same payment amount over the life of the mortgage. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally monthly payments on your fixed-rate mortgage will be very stable.
At the beginning of a a fixed-rate mortgage loan, the majority the payment goes toward interest. This proportion reverses as the loan ages.
Borrowers might choose a fixed-rate loan to lock in a low rate. Borrowers select fixed-rate loans because interest rates are low and they want to lock in this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at the best rate currently available. Call Homewithloan.com at 9727982110 to learn more.
There are many different types of Adjustable Rate Mortgages. Generally, interest on ARMs are determined by an outside index. A few of these are: the 6-month Certificate of Deposit (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 Adjustable Rate Mortgages feature this cap, so they won't go up above a certain amount in a given period. There may be a cap on interest rate variances over the course of a year. For example: no more than two percent per year, even if the index the rate is based on increases by more than two percent. Sometimes an ARM features a "payment cap" that guarantees your payment won't go above a fixed amount over the course of a given year. Most ARMs also cap your interest rate over the duration of the loan period.
ARMs usually start out at a very low rate that may increase as the loan ages. You've probably read about 5/1 or 3/1 ARMs. For these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are usually best for people who expect to move in three or five years. These types of adjustable rate loans most benefit people who will sell their house or refinance before the loan adjusts.
Most people who choose ARMs do so when they want to get lower introductory rates and don't plan to stay in the house longer than this initial low-rate period. ARMs are risky if property values go down and borrowers are unable to sell their home or refinance their loan.
Have questions about mortgage loans? Call us at 9727982110. We answer questions about different types of loans every day.