Differences between fixed and adjustable rate loans
A fixed-rate loan features the same payment over the life of your mortgage. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but generally, payments on fixed rate loans change little over the life of the loan.
During the early amortization period of a fixed-rate loan, most of your payment pays interest, and a significantly smaller percentage toward principal. As you pay , more of your payment is applied to principal.
You might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select these types of loans because interest rates are low and they want to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with 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 a good rate. Call America's Money Source at 4078987559 for details.
There are many kinds of Adjustable Rate Mortgages. Generally, the interest 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 ARMs are capped, which means they won't go up above a certain amount in a given period. Some ARMs won't adjust 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 the payment can go up in a given period. The majority of ARMs also cap your rate over the duration of the loan period.
ARMs most often feature the lowest rates toward the start. They usually guarantee the lower interest rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 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 adjust after the initial period. These loans are best for people who anticipate moving in three or five years. These types of ARMs benefit people who will move before the initial lock expires.
You might choose an ARM to take advantage of a lower initial interest rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. ARMs can be risky in a down market because homeowners can get stuck with rates that go up when they cannot sell their home or refinance at the lower property value.
Have questions about mortgage loans? Call us at 4078987559. We answer questions about different types of loans every day.