Differences between adjustable and fixed rate loans
A fixed-rate loan features a fixed payment amount over the life of your loan. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally payments for your fixed-rate mortgage will be very stable.
During the early amortization period of a fixed-rate loan, most of your payment pays interest, and a much smaller percentage goes to principal. That gradually reverses itself as the loan ages.
You might choose a fixed-rate loan to lock in a low interest rate. Borrowers choose fixed-rate loans because interest rates are low and they want to lock in at the lower rate. If you have an Adjustable Rate Mortgage (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 a good rate. Call Chris Caggiano - Grand Oaks Funding, LLC at (718) 477-4405 to learn more.
There are many types of Adjustable Rate Mortgages. ARMs are generally adjusted every six months, based on various indexes.
Most Adjustable Rate Mortgages are capped, so they won't go up above a specific amount in a given period. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than a couple percent per year, even though the index the rate is based on increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount your monthly payment can go up in one period. Most ARMs also cap your interest rate over the life of the loan period.
ARMs most often have the lowest rates toward the start. They usually provide that interest rate from a month to ten years. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These loans are fixed for a number of years (3 or 5), then they adjust after the initial period. Loans like this are best for people who anticipate moving within three or five years. These types of adjustable rate programs most benefit people who plan to sell their house or refinance before the initial lock expires.
You might choose an ARM to get a very low initial interest rate and count on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs can be risky when property values go down and borrowers can't sell or refinance their loan.
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!