Differences between fixed and adjustable loans
With a fixed-rate loan, your payment doesn't change for the entire duration of the mortgage. The amount that goes to principal (the loan amount) increases, however, the amount you pay in interest will go down accordingly. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally payment amounts on your fixed-rate loan will be very stable.
When you first take out a fixed-rate loan, most of your payment is applied to interest. As you pay , more of your payment is applied to principal.
Borrowers can choose a fixed-rate loan to lock in a low rate. Borrowers select fixed-rate loans because interest rates are low and they wish to lock in this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call The Mortgage Exchange Service LLC at 7032555810 for details.
There are many kinds of Adjustable Rate Mortgages. Generally, the interest for ARMs are based on an outside index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most ARMs feature this cap, which means they can't go up over a certain amount in a given period. Some ARMs won't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which guarantees that your payment can't increase beyond a fixed amount in a given year. Additionally, almost all adjustable programs feature a "lifetime cap" — your interest rate will never exceed the cap percentage.
ARMs usually start at a very low rate that usually increases as the loan ages. You've probably heard of 5/1 or 3/1 ARMs. For these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These types of loans are fixed for a certain number of years (3 or 5), then they adjust. These loans are often best for people who expect to move within three or five years. These types of adjustable rate programs most benefit people who will sell their house or refinance before the initial lock expires.
Most borrowers who choose ARMs do so because they want to get lower introductory rates and do not plan to stay in the home for any longer than the introductory low-rate period. ARMs can be risky when property values decrease and borrowers cannot sell their home or refinance their loan.
Have questions about mortgage loans? Call us at 7032555810. We answer questions about different types of loans every day.