Adjustable versus fixed loans
A fixed-rate loan features a fixed payment amount for the entire duration of your mortgage. The property taxes and homeowners insurance will go up over time, but generally, payments on these types of loans change little over the life of the loan.
Early in a fixed-rate loan, a large percentage of your payment goes toward interest, and a significantly smaller percentage toward principal. The amount paid toward your principal amount goes up slowly every month.
Borrowers can choose a fixed-rate loan to lock in a low rate. People select fixed-rate loans when interest rates are low and they wish to lock in at this lower 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 have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at the best rate currently available. Call America's Money Source at 4078987559 to discuss how we can help.
Adjustable Rate Mortgages — ARMs, come in even more varieties. Generally, the interest rates on ARMs are determined by a federal index. A few of these are: the 6-month Certificate of Deposit (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 monthly payment increases. There may be a cap on interest rate increases over the course of a year. For example: no more than two percent a year, even if the index the rate is based on increases by more than two percent. Sometimes an ARM features a "payment cap" that ensures that your payment won't go above a certain amount over the course of a given year. Additionally, almost all ARM programs have a "lifetime cap" — this means that the rate can't ever go over the cap amount.
ARMs usually start at a very low rate that usually increases over time. 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. After this period it adjusts every year. These kinds of loans are fixed for a certain number of years (3 or 5), then they adjust. These loans are often best for people who expect to move within three or five years. These types of adjustable rate programs are best for borrowers who plan to sell their house or refinance before the initial lock expires.
Most borrowers who choose ARMs choose them when they want to take advantage of lower introductory rates and do not plan on remaining in the home for any longer than this initial low-rate period. ARMs are risky if property values go down and borrowers cannot sell their home or refinance.
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!