Differences between fixed and adjustable rate loans
With a fixed-rate loan, your monthly payment remains the same for the entire duration of the mortgage. The amount that goes for principal (the amount you borrowed) will increase, however, the amount you pay in interest will go down in the same amount. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but for the most part, payment amounts on fixed rate loans don't increase much.
Your first few years of payments on a fixed-rate loan are applied mostly to pay interest. The amount applied to principal increases up slowly every month.
Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. People choose fixed-rate loans because 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 offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at a good rate. Call Integrated Financial Solutions, LLC at 4104614043 to discuss your situation with one of our professionals.
There are many different types of Adjustable Rate Mortgages. Generally, interest rates on ARMs are determined by a federal index. A few of these are: the 6-month CD rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most programs feature a cap that protects you from sudden monthly payment increases. Some ARMs won't adjust 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 monthly payment can increase in a given period. Most ARMs also cap your rate over the duration of the loan period.
ARMs usually start at a very low rate that may increase over time. You may hear people talking about "3/1 ARMs" or "5/1 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 number of years (3 or 5), then they adjust after the initial period. Loans like this are best for people who anticipate moving in three or five years. These types of ARMs benefit borrowers who will sell their house or refinance before the initial lock expires.
You might choose an ARM to get a lower initial interest rate and count on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs can be risky if property values go down and borrowers are unable to sell or refinance their loan.
Have questions about mortgage loans? Call us at 4104614043. We answer questions about different types of loans every day.