Adjustable versus fixed loans
With a fixed-rate loan, your monthly payment never changes for the entire duration of the loan. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but for the most part, payment amounts on these types of loans change little over the life of the loan.
Early in a fixed-rate loan, most of your monthly payment pays interest, and a much smaller percentage toward principal. This proportion reverses as the loan ages.
You can choose a fixed-rate loan in order to lock in a low rate. Borrowers choose these types of loans when interest rates are low and they wish to lock in at this low rate. For homeowners who have an 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 Chris Caggiano - Grand Oaks Funding, LLC at (718) 477-4405 to learn more.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. Generally, the interest rates on ARMs are based on a federal index. Some examples of outside indexes are: the 6-month CD rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most programs have a cap that protects you from sudden monthly payment increases. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that the monthly payment can go up in one period. Almost all ARMs also cap your rate over the duration of the loan.
ARMs most often feature their lowest, most attractive rates at the beginning of the loan. They usually guarantee that interest rate for an initial period that varies greatly. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust. Loans like this are usually best for people who anticipate moving in three or five years. These types of adjustable rate loans most benefit borrowers who will move before the initial lock expires.
Most borrowers who choose ARMs do so because they want to get lower introductory rates and don't plan on remaining in the home longer than the introductory low-rate period. ARMs can be risky when property values decrease and borrowers can't sell or refinance.
Have questions about mortgage loans? Call us at (718) 477-4405. It's our job to answer these questions and many others, so we're happy to help!