Differences between fixed and adjustable loans
With a fixed-rate loan, your payment stays the same for the entire duration of the loan. The portion allocated for your principal (the amount you borrowed) will increase, however, your interest payment will decrease accordingly. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. For the most part payments for your fixed-rate mortgage will be very stable.
When you first take out a fixed-rate loan, the majority your payment is applied to interest. This proportion gradually reverses itself as the loan ages.
Borrowers might choose a fixed-rate loan in order to lock in a low rate. People select fixed-rate loans because interest rates are low and they wish to lock in the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at a favorable rate. Call America's Money Source at 4078987559 for details.
Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. Generally, interest for 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 Adjustable Rate Mortgages are capped, which means they won't increase above a specified amount in a given period of time. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount that the payment can go up in one period. In addition, almost all adjustable programs have a "lifetime cap" — the rate can't ever exceed the cap percentage.
ARMs most often have their lowest, most attractive rates at the beginning of the loan. They usually provide that interest rate for an initial period that varies greatly. You've likely read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are best for people who expect to move within three or five years. These types of adjustable rate programs are best for people who plan to sell their house or refinance before the loan adjusts.
Most borrowers who choose ARMs choose them when they want to get lower introductory rates and do not plan on remaining in the home longer than this introductory low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up if they cannot sell their home or refinance with a lower property value.
Have questions about mortgage loans? Call us at 4078987559. We answer questions about different types of loans every day.