Fixed versus adjustable loans
A fixed-rate loan features the same payment over the life of your mortgage. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part payments for your fixed-rate mortgage will increase very little.
Your first few years of payments on a fixed-rate loan are applied primarily to pay interest. That reverses itself as the loan ages.
You might choose a fixed-rate loan to lock in a low interest rate. Borrowers choose these types of loans when interest rates are low and they wish to lock in at the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at a good rate. Call National Asset Mortgage, LLC at (855) 391-3290 for details.
Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, interest rates on ARMs are based on a federal index. A few of these are: the 6-month CD rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most ARM programs have a "cap" that protects borrowers from sudden increases in monthly payments. Some ARMs won't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which ensures that your payment will not increase beyond a certain amount over the course of a given year. Additionally, almost all ARM programs feature a "lifetime cap" — this means that the rate can never go over the cap amount.
ARMs most often have their lowest, most attractive rates at the start of the loan. They usually guarantee the lower interest rate for an initial period that varies greatly. You've likely read about 5/1 or 3/1 ARMs. For 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 after the initial period. Loans like this are often best for people who anticipate moving within three or five years. These types of ARMs benefit borrowers who will move before the loan adjusts.
Most people who choose ARMs do so because they want to get lower introductory rates and don't plan to stay in the house for any longer than this introductory low-rate period. ARMs can be risky when property values go down and borrowers can't sell their home or refinance.
Have questions about mortgage loans? Call us at (855) 391-3290. It's our job to answer these questions and many others, so we're happy to help!