Differences between adjustable and fixed loans
With a fixed-rate loan, your payment stays the same for the life of your mortgage. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance will increase over time, but generally, payments on fixed rate loans don't increase much.
During the early amortization period of a fixed-rate loan, a large percentage of your payment pays interest, and a much smaller percentage toward principal. As you pay on the loan, more of your payment is applied to principal.
You can choose a fixed-rate loan in order to lock in a low rate. People choose these types of loans when interest rates are low and they want to lock in at this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at a favorable rate. Call Custom Lending Group at 7072522700 to discuss your situation with one of our professionals.
Adjustable Rate Mortgages — ARMs, come in even more varieties. Generally, the interest for ARMs are based on an outside index. Some examples of outside indexes are: the 6-month CD rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
The majority of ARMs are capped, which means they can't go up above a certain amount in a given period of time. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which guarantees your payment won't go above a fixed amount over the course of a given year. The majority of ARMs also cap your rate over the life of the loan period.
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". For these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for a certain number of years (3 or 5), then they adjust after the initial period. Loans like this are often best for borrowers who expect to move within three or five years. These types of ARMs are best for borrowers who plan to sell their house or refinance before the initial lock expires.
Most people who choose ARMs do so when they want to get lower introductory rates and do not plan to remain in the house longer than the initial low-rate period. ARMs are risky when property values go down and borrowers are unable to sell their home or refinance their loan.
Have questions about mortgage loans? Call us at 7072522700. We answer questions about different types of loans every day.