Differences between fixed and adjustable rate loans
With a fixed-rate loan, your monthly payment doesn't change for the life of the mortgage. The portion of the payment allocated for your principal (the loan amount) will go up, but the amount you pay in interest will decrease in the same amount. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part payments for a fixed-rate loan will increase very little.
Your first few years of payments on a fixed-rate loan are applied primarily to pay interest. As you pay on the loan, more of your payment is applied to principal.
Borrowers might choose a fixed-rate loan to lock in a low rate. People select these types of loans because interest rates are low and they want to lock in at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at the best rate currently available. Call Carter Financial Solutions at 866-840-8745 x2 to learn more.
Adjustable Rate Mortgages — ARMs, come in even more varieties. Generally, the interest rates for ARMs are determined by an outside index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most programs feature a cap that protects borrowers from sudden increases in monthly payments. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than two percent per year, even if the underlying index goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount your monthly payment can increase in one period. Additionally, almost all adjustable programs feature a "lifetime cap" — your interest rate won't go over the cap amount.
ARMs usually start at a very low rate that usually increases over time. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is set for three or five years. It then adjusts every year. These types of loans are fixed for a number of years (3 or 5), then adjust. These loans are usually best for people who anticipate moving in three or five years. These types of adjustable rate programs benefit people who plan to move before the initial lock expires.
You might choose an ARM to get a lower introductory rate and count on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up if they can't sell their home or refinance at the lower property value.
Have questions about mortgage loans? Call us at 866-840-8745 x2. We answer questions about different types of loans every day.