Fixed versus adjustable rate loans
A fixed-rate loan features the same payment amount for the entire duration of your loan. The property taxes and homeowners insurance will increase over time, but generally, payments on these types of loans change little over the life of the loan.
At the beginning of a a fixed-rate mortgage loan, most of your payment goes toward interest. The amount applied to principal goes up gradually each month.
You might choose a fixed-rate loan to lock in a low rate. People choose fixed-rate loans because interest rates are low and they wish to lock in this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at the best rate currently available. Call Rick Brown, Elite Financing Group at 5122791520 to learn more.
Adjustable Rate Mortgages — ARMs, come in even more varieties. Generally, the interest on ARMs are based on a federal index. Some examples of outside indexes are: the 6-month 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 programs have a "cap" that protects you from sudden monthly payment increases. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than a couple percent a year, even though the index the rate is based on goes up by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that your payment can go up in one period. Almost all ARMs also cap your interest rate over the duration of the loan.
ARMs usually start out at a very low rate that usually increases as the loan ages. You've probably read about 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 adjust. These loans are often best for people who anticipate moving within three or five years. These types of adjustable rate loans are best for borrowers who plan to move before the initial lock expires.
You might choose an Adjustable Rate Mortgage to get a very low initial interest rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs are risky when property values decrease and borrowers cannot sell their home or refinance their loan.
Have questions about mortgage loans? Call us at 5122791520. We answer questions about different types of loans every day.