Differences between adjustable and fixed loans
With a fixed-rate loan, your monthly payment doesn't change for the life of the mortgage. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but for the most part, payments on these types of loans don't increase much.
Your first few years of payments on a fixed-rate loan are applied mostly toward interest. As you pay on the loan, more of your payment is applied to principal.
You might choose a fixed-rate loan to lock in a low interest rate. People choose these types of loans when interest rates are low and they want to lock in at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at a favorable rate. Call The Mortgage House at 9037471800 for details.
Adjustable Rate Mortgages — ARMs, come in even more varieties. Generally, interest rates on ARMs are based on an outside index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
The majority of Adjustable Rate Mortgages feature this cap, so they won't go up over a specified amount in a given period. There may be a cap on how much your interest rate can go up in one period. For example: no more than two percent per year, even if the underlying index goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that your monthly payment can increase in a given period. Plus, almost all ARMs have a "lifetime cap" — this cap means that your interest rate can never go over the capped amount.
ARMs usually start out at a very low rate that may increase over time. You've likely read about 5/1 or 3/1 ARMs. For these loans, the initial 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 they adjust. Loans like this are best for borrowers who anticipate moving in three or five years. These types of adjustable rate loans benefit borrowers who will move before the initial lock expires.
You might choose an ARM to take advantage of a very low introductory interest rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs are risky if property values go down and borrowers can't sell or refinance.
Have questions about mortgage loans? Call us at 9037471800. It's our job to answer these questions and many others, so we're happy to help!