Fixed versus adjustable rate loans
With a fixed-rate loan, your monthly payment remains the same for the life of the loan. The portion of the payment allocated for principal (the loan amount) goes up, however, the amount you pay in interest will go down in the same amount. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally monthly payments for your fixed-rate loan will increase very little.
At the beginning of a a fixed-rate mortgage loan, most of the payment is applied to interest. As you pay , more of your payment is applied to principal.
You can choose a fixed-rate loan in order to lock in a low interest rate. People choose these types of loans when interest rates are low and they want to lock in this lower 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 the best rate currently available. Call The Mortgage Exchange Service LLC at 703.255-5810 for details.
Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, the interest for ARMs are determined by an outside 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 ARM programs have a "cap" that protects borrowers from sudden increases in monthly payments. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which guarantees that your payment can't go above a fixed amount over the course of a given year. Plus, the great majority of adjustable programs have a "lifetime cap" — your interest rate can't ever exceed the cap percentage.
ARMs usually start out at a very low rate that may increase as the loan ages. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is fixed 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 after the initial period. Loans like this are usually best for borrowers who anticipate moving in three or five years. These types of adjustable rate loans most benefit people who will move before the loan adjusts.
Most borrowers who choose ARMs do so when they want to get lower introductory rates and do not plan on staying in the house longer than this introductory low-rate period. ARMs can be risky if property values go down and borrowers cannot sell their home or refinance their loan.
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!