Differences between adjustable and fixed rate loans
A fixed-rate loan features a fixed payment for the entire duration of your mortgage. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but in general, payment amounts on these types of loans vary little.
During the early amortization period of a fixed-rate loan, most of your monthly payment pays interest, and a much smaller part goes to principal. This proportion gradually reverses itself as the loan ages.
You might choose a fixed-rate loan in order to lock in a low rate. People select these types of loans because interest rates are low and they wish to lock in at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at a favorable rate. Call Homewithloan.com at 9727982110 to learn more.
Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. Generally, interest rates on ARMs are based on an outside index. A few of these are: the 6-month CD rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most ARM programs have a "cap" that protects borrowers 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 a couple percent per year, even if the index the rate is based on increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount the payment can increase in one period. Almost all ARMs also cap your rate over the duration of the loan.
ARMs most often feature the lowest, most attractive rates at the start of the loan. They guarantee the lower rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then they adjust. These loans are often best for borrowers who anticipate moving within three or five years. These types of adjustable rate programs benefit borrowers who will move before the initial lock expires.
Most borrowers who choose ARMs do so because they want to get lower introductory rates and don't plan to remain in the house for any longer than this introductory low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates when they can't sell or refinance at the lower property value.
Have questions about mortgage loans? Call us at 9727982110. We answer questions about different types of loans every day.