Adjustable versus fixed rate loans
With a fixed-rate loan, your payment doesn't change for the entire duration of the loan. The amount of the payment that goes for your principal (the loan amount) will increase, however, the amount you pay in interest will go down in the same amount. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but generally, payment amounts on these types of loans don't increase much.
When you first take out a fixed-rate mortgage loan, most of the payment is applied to interest. The amount paid toward your principal amount goes up gradually each month.
You might choose a fixed-rate loan in order to lock in a low rate. Borrowers choose fixed-rate loans because interest rates are low and they wish to lock in this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide 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 a good rate. Call National Asset Mortgage, LLC at (855) 391-3290 to discuss your situation with one of our professionals.
Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, interest rates on ARMs are determined by a federal index. A few of these 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 ARM programs feature 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 features a "payment cap" which ensures that your payment will not go above a certain amount over the course of a given year. The majority of ARMs also cap your rate over the duration of the loan period.
ARMs usually start at a very low rate that may increase over time. You may hear people talking 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 certain number of years (3 or 5), then they adjust after the initial period. These loans are usually best for people who expect to move in three or five years. These types of ARMs benefit people who plan to move 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 for any longer than the introductory low-rate period. ARMs can be risky in a down market because homeowners could be stuck with increasing rates when they can't sell or refinance at the lower property value.
Have questions about mortgage loans? Call us at (855) 391-3290. We answer questions about different types of loans every day.