Differences between fixed and adjustable loans
With a fixed-rate loan, your payment never changes for the entire duration of your loan. The longer you pay, the more of your payment goes toward principal. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part monthly payments for your fixed-rate mortgage will be very stable.
When you first take out a fixed-rate loan, the majority your payment goes toward interest. As you pay , more of your payment is applied to principal.
Borrowers can choose a fixed-rate loan to lock in a low rate. Borrowers choose fixed-rate loans because interest rates are low and they wish to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at the best rate currently available. Call Integrated Financial Solutions, LLC at 4104614043 to learn more.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. Generally, the interest for ARMs are based on an outside index. Some examples of outside indexes 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 ARM programs feature a cap that protects you from sudden increases in monthly payments. Some ARMs can't increase more than two percent per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that the payment can increase in a given period. Plus, the great majority of ARMs feature a "lifetime cap" — the interest rate won't go over the cap percentage.
ARMs usually start out at a very low rate that may increase as the loan ages. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set for three or five years. It then adjusts every year. These types of loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are usually best for people who expect to move within three or five years. These types of adjustable rate programs benefit borrowers who plan to move before the loan adjusts.
You might choose an ARM to take advantage of a very low introductory interest rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates when they cannot sell their home or refinance at the lower property value.
Have questions about mortgage loans? Call us at 4104614043. We answer questions about different types of loans every day.