Differences between fixed and adjustable rate loans
A fixed-rate loan features the same payment amount for the entire duration of your mortgage. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part payment amounts for your fixed-rate mortgage will be very stable.
When you first take out a fixed-rate mortgage loan, most of your payment is applied to interest. This proportion gradually reverses as the loan ages.
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 the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at the best rate currently available. Call Quick Quote Mortgage NMLS #388278 at 866-584-4650 to discuss your situation with one of our professionals.
There are many kinds of Adjustable Rate Mortgages. Generally, the interest on ARMs are determined by an outside index. A few of these 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 ARMs are capped, so they won't increase above a specific amount in a given period. Some ARMs can't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which ensures that your payment can't increase beyond a certain amount over the course of a given year. Almost all ARMs also cap your interest rate over the life of the loan.
ARMs most often have the lowest rates at the start. They provide that interest rate for an initial period that varies greatly. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the initial rate is set for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are often best for borrowers who expect to move in three or five years. These types of ARMs most benefit people who will move before the loan adjusts.
Most borrowers who choose ARMs do so because they want to take advantage of lower introductory rates and don't plan on remaining in the home longer than this introductory low-rate period. ARMs can be risky when property values go down and borrowers can't sell their home or refinance.
Have questions about mortgage loans? Call us at 866-584-4650. We answer questions about different types of loans every day.