Adjustable versus fixed rate loans
With a fixed-rate loan, your payment doesn't change for the life of your mortgage. The portion that goes for your principal (the actual loan amount) will go up, however, the amount you pay in interest will go down in the same amount. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. For the most part payment amounts for a fixed-rate loan will be very stable.
Your first few years of payments on a fixed-rate loan are applied mostly to pay interest. This proportion reverses itself as the loan ages.
Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select these types of loans because interest rates are low and they wish to lock in at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide more monthly payment stability. 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 types of Adjustable Rate Mortgages. Generally, interest on ARMs are based on a federal index. Some examples of outside indexes are: the 6-month CD rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
The majority of Adjustable Rate Mortgages are capped, so they can't go up above a specified amount in a given period. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than a couple percent per year, even though the underlying index increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that your payment can go up in a given period. In addition, the great majority of adjustable programs have a "lifetime cap" — your rate won't go over the cap percentage.
ARMs usually start out at a very low rate that usually increases over time. You've probably read about 5/1 or 3/1 ARMs. For these loans, the introductory rate is set 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 people who anticipate moving within three or five years. These types of adjustable rate programs benefit people who will move before the initial lock expires.
You might choose an ARM to take advantage of a very low initial rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs are risky if property values decrease and borrowers cannot 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.