Differences between fixed and adjustable rate loans
A fixed-rate loan features a fixed payment amount for the entire duration of the mortgage. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally payment amounts for a fixed-rate loan will increase very little.
Early in a fixed-rate loan, most of your monthly payment pays interest, and a much smaller percentage goes to principal. The amount applied to your principal amount goes up slowly each month.
Borrowers might choose a fixed-rate loan in order to lock in a low rate. People choose fixed-rate loans when interest rates are low and they wish to lock in the low rate. For homeowners who have an ARM now, refinancing with 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 the best rate currently available. Call Firelight Mortgage Consultants at 3032282254 to discuss how we can help.
Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, the interest for ARMs are based on a federal index. A few of these are: the 6-month CD rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
The majority of Adjustable Rate Mortgages feature this cap, which means they won't go up over a specified amount in a given period of time. Some ARMs won't adjust 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 your payment can increase in a given period. Plus, almost all ARM programs have a "lifetime cap" — the interest rate can never go over the cap percentage.
ARMs most often feature their lowest, most attractive rates at the beginning. They usually provide that rate for an initial period that varies greatly. You've probably read about 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then they adjust. These loans are often best for people who anticipate moving within three or five years. These types of ARMs most benefit people who will sell their house or refinance before the initial lock expires.
You might choose an Adjustable Rate Mortgage to get a lower introductory rate and plan on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs are risky when property values decrease and borrowers can't sell or refinance their loan.
Have questions about mortgage loans? Call us at 3032282254. It's our job to answer these questions and many others, so we're happy to help!