Fixed versus adjustable loans
With a fixed-rate loan, your payment remains the same for the entire duration of your mortgage. The portion of the payment that goes to principal (the actual loan amount) will increase, however, the amount you pay in interest will decrease in the same amount. The property taxes and homeowners insurance will increase over time, but for the most part, payments on these types of loans vary little.
Your first few years of payments on a fixed-rate loan are applied mostly to pay 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 select these types of loans because interest rates are low and they wish to lock in this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at a good rate. Call The Mortgage Exchange Service LLC at 7032555810 for details.
There are many kinds of Adjustable Rate Mortgages. Generally, the interest on ARMs are based on an outside index. A few of these 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 ARM programs have a "cap" that protects you from sudden increases in monthly payments. Some ARMs can't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that ensures your payment will not go above a certain amount in a given year. Plus, the great majority of ARMs have a "lifetime cap" — this means that the rate can't go over the cap amount.
ARMs most often feature the lowest, most attractive rates toward the start. They guarantee the lower interest rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory 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 after the initial period. Loans like this are often best for borrowers who expect to move in three or five years. These types of ARMs most benefit people who plan to sell their house or refinance before the loan adjusts.
You might choose an Adjustable Rate Mortgage to take advantage of a very low introductory rate and count on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs are risky if property values go down and borrowers cannot sell or refinance.
Have questions about mortgage loans? Call us at 7032555810. We answer questions about different types of loans every day.