Differences between adjustable and fixed rate loans
A fixed-rate loan features the same payment for the entire duration of your mortgage. The property taxes and homeowners insurance will increase over time, but in general, payments on fixed rate loans don't increase much.
Your first few years of payments on a fixed-rate loan are applied primarily to pay interest. As you pay , more of your payment goes toward principal.
You might choose a fixed-rate loan in order to lock in a low rate. Borrowers select these types of loans when interest rates are low and they want to lock in this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at a good rate. Call Carter Financial Solutions at 866-840-8745 x2 for details.
Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. Generally, the interest rates for ARMs are determined by a federal index. A few of these are: the 6-month CD rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most Adjustable Rate Mortgages feature this cap, which means they won't go up over a certain amount in a given period. Some ARMs can't increase more than 2% per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount that your payment can go up in a given period. Almost all ARMs also cap your rate over the duration of the loan period.
ARMs usually start at a very low rate that usually increases over time. You've likely 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 kinds of loans are fixed for 3 or 5 years, then adjust. Loans like this are best for people who anticipate moving within three or five years. These types of adjustable rate loans most benefit borrowers who plan to sell their house or refinance before the initial lock expires.
Most borrowers who choose ARMs choose them because they want to get lower introductory rates and don't plan to stay in the house longer than this initial low-rate period. ARMs can be risky in a down market because homeowners can get stuck with increasing rates if they cannot sell or refinance with a 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.