Fixed versus adjustable rate loans
A fixed-rate loan features the same payment for the entire duration of your mortgage. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. For the most part payments on a fixed-rate loan will be very stable.
Early in a fixed-rate loan, a large percentage of your monthly payment goes toward interest, and a much smaller part toward principal. The amount paid toward your principal amount increases up slowly each month.
You can choose a fixed-rate loan to lock in a low rate. People choose these types of loans because interest rates are low and they wish to lock in this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at a favorable rate. Call Quick Quote Mortgage NMLS #388278 at 866-584-4650 to learn more.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. Generally, interest for ARMs are based on a federal index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most programs feature a cap that protects borrowers from sudden monthly payment increases. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than two percent per year, even though the underlying index goes up by more than two percent. Sometimes an ARM has a "payment cap" that guarantees that your payment can't go above a certain amount in a given year. Plus, almost all ARMs feature a "lifetime cap" — this cap means that the rate won't go over the capped amount.
ARMs usually start at a very low rate that usually increases as the loan ages. You've probably read about 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 3 or 5 years, then they adjust. Loans like this are best for people who expect to move within three or five years. These types of adjustable rate programs benefit people who plan to sell their house or refinance before the loan adjusts.
You might choose an ARM to get a very low initial rate and plan on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs can be risky if property values decrease and borrowers are unable to sell their home 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.