Differences between fixed and adjustable loans
A fixed-rate loan features a fixed payment over the life of the loan. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but in general, payments on these types of loans don't increase much.
Your first few years of payments on a fixed-rate loan are applied primarily to pay interest. As you pay on the loan, more of your payment is applied to principal.
You might choose a fixed-rate loan to lock in a low interest rate. People choose fixed-rate loans when interest rates are low and they want to lock in at the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater 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 favorable rate. Call America's Money Source at 4078987559 to learn more.
There are many different kinds of Adjustable Rate Mortgages. Generally, the interest on ARMs are determined by a federal index. Some examples of outside indexes are: the 6-month CD rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most ARM programs have 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. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that the monthly payment can go up in a given period. The majority of ARMs also cap your rate over the duration of the loan.
ARMs most often have their lowest rates toward the beginning of the loan. They guarantee that rate from a month to ten years. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is fixed for three or five years. It then adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust. These loans are usually best for people who anticipate moving in three or five years. These types of adjustable rate loans most benefit borrowers who plan to sell their house or refinance before the loan adjusts.
Most borrowers who choose ARMs choose them when they want to take advantage of lower introductory rates and do not plan on staying in the house longer than this initial low-rate period. ARMs can be risky when housing prices go down 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 4078987559. We answer questions about different types of loans every day.