Differences between fixed and adjustable loans
A fixed-rate loan features a fixed payment over the life of the loan. The property taxes and homeowners insurance will increase over time, but in general, payments on fixed rate loans don't increase much.
When you first take out a fixed-rate loan, most of your payment is applied to interest. The amount paid toward your principal amount goes up gradually each month.
Borrowers might choose a fixed-rate loan to lock in a low rate. People select these types of loans when 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 more stability in monthly payments. 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 Home Pointe Mortgage Company at 7702202800 to learn more.
Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. Generally, interest rates on ARMs are determined by 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.
The majority of Adjustable Rate Mortgages are capped, which means they won't go up over a specified amount in a given period. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which ensures your payment won't go above a certain amount over the course of a given year. The majority of ARMs also cap your interest rate over the duration of the loan.
ARMs most often have their lowest rates toward the start. They usually guarantee that rate from a month to ten years. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are usually best for borrowers who expect to move within three or five years. These types of ARMs benefit borrowers who plan to sell their house or refinance before the initial lock expires.
You might choose an Adjustable Rate Mortgage to take advantage of a lower initial rate and plan 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 increasing rates if they can't sell their home or refinance with a lower property value.
Have questions about mortgage loans? Call us at 7702202800. We answer questions about different types of loans every day.