Adjustable versus fixed rate loans
A fixed-rate loan features the same payment amount over the life of your loan. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but for the most part, payments on these types of loans change little over the life of the loan.
At the beginning of a a fixed-rate mortgage loan, most of your payment is applied to interest. As you pay , more of your payment goes toward principal.
Borrowers might choose a fixed-rate loan to lock in a low interest rate. Borrowers select fixed-rate loans because interest rates are low and they wish to lock in this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more 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 the best rate currently available. Call National Asset Mortgage, LLC at (855) 391-3290 to discuss how we can help.
There are many types of Adjustable Rate Mortgages. Generally, interest rates for 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.
Most ARMs feature this cap, which means they can't go up above a specified amount in a given period of time. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than a couple percent per year, even if the index the rate is based on increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount the monthly payment can increase in a given period. Plus, almost all ARM programs have a "lifetime cap" — this means that the rate can't ever go over the cap amount.
ARMs usually start out at a very low rate that may increase as the loan ages. You've likely heard of 5/1 or 3/1 ARMs. In these loans, the initial rate is set for three or five years. It then adjusts every year. These loans are fixed for a certain number of years (3 or 5), then they adjust. These loans are 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 sell their house or refinance before the initial lock expires.
Most people who choose ARMs do so when they want to get lower introductory rates and do not plan to stay in the home longer than the introductory low-rate period. ARMs are risky when property values decrease and borrowers can't sell or refinance their loan.
Have questions about mortgage loans? Call us at (855) 391-3290. We answer questions about different types of loans every day.