Adjustable versus fixed loans
With a fixed-rate loan, your monthly payment never changes for the life of your loan. The amount of the payment allocated for principal (the actual loan amount) increases, but the amount you pay in interest will decrease accordingly. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part payments on a fixed-rate loan will increase very little.
When you first take out a fixed-rate mortgage loan, most of the payment is applied to interest. This proportion reverses as the loan ages.
You might choose a fixed-rate loan in order to lock in a low interest rate. People select these types of loans when interest rates are low and they want to lock in at this low rate. If you have an Adjustable Rate Mortgage (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'd love to assist you in locking a fixed-rate at the best rate currently available. 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 a federal index. Some examples of outside indexes are: the 6-month Certificate of Deposit (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 Adjustable Rate Mortgages are capped, which means they can't increase over a specified amount in a given period of time. Some ARMs won't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which guarantees your payment can't go above a fixed amount in a given year. Most ARMs also cap your interest rate over the duration of the loan period.
ARMs most often have the lowest rates toward the start. They usually provide the lower interest rate from a month to ten years. You've probably heard of 5/1 or 3/1 ARMs. For these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These types of loans are fixed for a number of years (3 or 5), then adjust. Loans like this are best for borrowers who anticipate moving within three or five years. These types of adjustable rate loans benefit people who plan to sell their house or refinance before the initial lock expires.
You might choose an Adjustable Rate Mortgage to take advantage of a lower introductory interest rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up if they cannot sell or refinance with a lower property value.
Have questions about mortgage loans? Call us at 7072522700. We answer questions about different types of loans every day.