Fixed versus adjustable rate loans
A fixed-rate loan features a fixed payment amount for the entire duration of the loan. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part monthly payments on your fixed-rate loan will be very stable.
Early in a fixed-rate loan, a large percentage of your payment goes toward interest, and a much smaller part toward principal. As you pay on the loan, more of your payment is applied to principal.
You can choose a fixed-rate loan to lock in a low interest 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 with a fixed-rate loan can provide more 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 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, interest for ARMs are based on an outside index. Some examples of outside indexes are: the 6-month CD rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
The majority of ARMs are capped, so they can't increase above a specific 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 that your payment will not go above a certain amount over the course of a given year. Additionally, almost all ARM programs have a "lifetime cap" — your interest rate can't ever exceed the capped percentage.
ARMs most often feature their lowest rates toward the beginning. They provide that interest rate from a month to ten years. 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. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are usually best for borrowers who expect to move in three or five years. These types of ARMs most benefit borrowers who will sell their house or refinance before the initial lock expires.
Most people who choose ARMs choose them because they want to take advantage of lower introductory rates and do not plan on staying in the house longer than this initial low-rate period. ARMs can be risky if property values go down and borrowers can't sell or refinance their loan.
Have questions about mortgage loans? Call us at 866-584-4650. We answer questions about different types of loans every day.