Adjustable versus fixed rate loans
With a fixed-rate loan, your payment remains the same for the life of the mortgage. The portion allocated for your principal (the actual loan amount) will increase, but the amount you pay in interest will go down in the same amount. The property taxes and homeowners insurance will increase over time, but generally, payments on fixed rate loans don't increase much.
During the early amortization period of a fixed-rate loan, a large percentage of your monthly payment pays interest, and a significantly smaller percentage toward principal. As you pay , more of your payment goes toward principal.
You might choose a fixed-rate loan to lock in a low rate. Borrowers choose these types of loans because 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 have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at a favorable rate. Call Carter Financial Solutions at 866-840-8745 x2 to discuss how we can help.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. Generally, the interest rates on ARMs are determined by an outside index. A few of these are: the 6-month 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 programs have a cap that protects borrowers from sudden increases in monthly payments. Some ARMs can't increase more than two percent per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that the payment can go up in one period. Additionally, almost all ARM programs feature a "lifetime cap" — this means that your rate will never go over the cap percentage.
ARMs most often feature the lowest, most attractive rates toward the start. They usually guarantee that interest rate for an initial period that varies greatly. You've probably read about 5/1 or 3/1 ARMs. In these loans, the initial rate is set for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then they adjust. Loans like this are usually best for borrowers who expect to move in three or five years. These types of adjustable rate programs are best for people who plan to move before the initial lock expires.
Most people who choose ARMs choose them when they want to get lower introductory rates and don't plan to remain in the house for any longer than this initial low-rate period. ARMs can be risky if property values decrease and borrowers are unable to sell or refinance their loan.
Have questions about mortgage loans? Call us at 866-840-8745 x2. It's our job to answer these questions and many others, so we're happy to help!