Fixed versus adjustable rate loans
With a fixed-rate loan, your monthly payment never changes for the entire duration of the loan. The amount that goes for principal (the amount you borrowed) goes up, but your interest payment will go down in the same amount. The property tax and homeowners insurance will increase over time, but in general, payment amounts on these types of loans vary little.
During the early amortization period of a fixed-rate loan, a large percentage of your monthly payment goes toward interest, and a much smaller part toward principal. The amount applied to principal increases up gradually every month.
You can choose a fixed-rate loan to lock in a low rate. People choose fixed-rate loans because interest rates are low and they wish to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at the best rate currently available. Call Firelight Mortgage Consultants at 3032282254 to learn more.
There are many different kinds of Adjustable Rate Mortgages. Generally, the interest rates on 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.
Most programs feature a "cap" that protects borrowers from sudden monthly payment increases. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that guarantees your payment will not increase beyond a certain amount over the course of a given year. Plus, almost all ARM programs feature a "lifetime cap" — this cap means that your rate will never exceed the cap amount.
ARMs usually start out at a very low rate that usually increases as the loan ages. You've likely read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then adjust. Loans like this are usually best for people who anticipate moving in three or five years. These types of adjustable rate programs are best for borrowers who will sell their house or refinance before the loan adjusts.
You might choose an ARM to take advantage of a lower introductory interest rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs are risky when property values go down and borrowers can't sell their home or refinance.
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!