Fixed versus adjustable loans
A fixed-rate loan features the same payment over the life of your mortgage. The property tax and homeowners insurance will increase over time, but for the most part, payment amounts on fixed rate loans change little over the life of the loan.
At the beginning of a a fixed-rate loan, the majority the payment is applied to interest. This proportion gradually reverses as the loan ages.
You might choose a fixed-rate loan to lock in a low rate. Borrowers choose fixed-rate loans when interest rates are low and they wish to lock in this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call The Mortgage Exchange Service LLC at 703.255-5810 to discuss your situation with one of our professionals.
There are many different kinds of Adjustable Rate Mortgages. Generally, interest for ARMs are based on a federal index. Some examples of outside indexes are: the 6-month CD rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most ARMs are capped, so they won't increase over a specified amount in a given period. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than a couple percent a year, even if the underlying index goes up by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount that the payment can go up in one period. In addition, almost all adjustable programs have a "lifetime cap" — this cap means that the interest rate can't exceed the capped percentage.
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. In these loans, the initial rate is set for three or five years. It then adjusts every year. These kinds of loans are fixed for a certain number of years (3 or 5), then they adjust. Loans like this are often best for borrowers who expect to move in three or five years. These types of adjustable rate programs are best for borrowers who will sell their house or refinance before the loan adjusts.
You might choose an Adjustable Rate Mortgage to take advantage of a lower introductory rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky in a down market because homeowners could be stuck with rates that go up if they cannot sell or refinance with a lower property value.
Have questions about mortgage loans? Call us at 703.255-5810. It's our job to answer these questions and many others, so we're happy to help!