Adjustable versus fixed loans
With a fixed-rate loan, your payment remains the same for the entire duration of the mortgage. The amount allocated to principal (the amount you borrowed) will increase, however, your interest payment will go down accordingly. The property tax and homeowners insurance will go up over time, but for the most part, payment amounts on these types of loans don't increase much.
Your first few years of payments on a fixed-rate loan go primarily toward interest. As you pay , more of your payment is applied to principal.
You can 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 this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at the best rate currently available. Call The Mortgage Exchange Service LLC at 703.255-5810 to discuss how we can help.
Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. Generally, the interest on ARMs are determined by a federal index. A few of these 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 monthly payment increases. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than two percent a year, even though the index the rate is based on increases by more than two percent. Sometimes an ARM has a "payment cap" that ensures that your payment can't go above a fixed amount in a given year. Almost all ARMs also cap your rate over the duration of the loan.
ARMs most often have the lowest rates toward the beginning of the loan. They usually provide that rate from a month to ten years. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the initial rate is set for three or five years. It then adjusts every year. These types of loans are fixed for a number of years (3 or 5), then they adjust. Loans like this are often best for borrowers who anticipate moving within three or five years. These types of adjustable rate programs benefit people who plan to move before the loan adjusts.
Most people who choose ARMs do so because they want to take advantage of lower introductory rates and do not plan on remaining in the home for any longer than the initial low-rate period. ARMs can be risky in a down market because homeowners could be stuck with rates that go up when they cannot sell their home or refinance at the lower property value.
Have questions about mortgage loans? Call us at 703.255-5810. We answer questions about different types of loans every day.