Fixed versus adjustable rate loans
With a fixed-rate loan, your monthly payment stays the same for the entire duration of your mortgage. The portion of the payment allocated for principal (the amount you borrowed) will go up, but the amount you pay in interest will decrease accordingly. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally payments on your fixed-rate loan will be very stable.
During the early amortization period of a fixed-rate loan, a large percentage of your monthly payment pays interest, and a significantly smaller part toward principal. As you pay on the loan, more of your payment is applied to principal.
Borrowers might choose a fixed-rate loan to lock in a low interest rate. People select these types of loans because interest rates are low and they wish to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater 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 favorable rate. Call America's Money Source at 4078987559 to discuss how we can help.
There are many kinds of Adjustable Rate Mortgages. Generally, interest on ARMs are based on a federal 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 programs feature a "cap" that protects you from sudden increases in monthly payments. 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 a year, even though the underlying index increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount your payment can increase in a given period. Additionally, the great majority of adjustable programs have a "lifetime cap" — your interest rate won't go over the capped percentage.
ARMs usually start out at a very low rate that usually increases over time. You've probably read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust. These loans are often best for borrowers who expect to move within three or five years. These types of adjustable rate programs are best for borrowers who will move before the initial lock expires.
Most people who choose ARMs do so when they want to take advantage of lower introductory rates and do not plan on staying in the house longer than the initial low-rate period. 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 with a lower property value.
Have questions about mortgage loans? Call us at 4078987559. It's our job to answer these questions and many others, so we're happy to help!