Adjustable versus fixed rate loans
A fixed-rate loan features the same payment amount for the entire duration of the loan. The property taxes and homeowners insurance will increase over time, but for the most part, payments on these types of loans don't increase much.
Your first few years of payments on a fixed-rate loan are applied primarily toward interest. As you pay on the loan, more of your payment goes toward principal.
Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. People select fixed-rate loans because interest rates are low and they wish to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide more stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at the best rate currently available. Call Chris Caggiano - Grand Oaks Funding, LLC at (718) 477-4405 for details.
Adjustable Rate Mortgages — ARMs, come in many varieties. ARMs are normally adjusted every six months, based on various indexes.
The majority of Adjustable Rate Mortgages are capped, so they won't increase over a specific amount in a given period of time. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which guarantees that your payment can't go above a fixed amount in a given year. Plus, almost all adjustable programs have a "lifetime cap" — this means that your rate can't ever go over the capped percentage.
ARMs most often feature their lowest, most attractive rates at the beginning. They guarantee the lower rate from a month to ten years. You've likely read about 5/1 or 3/1 ARMs. For these loans, the initial rate is set for three or five years. It then adjusts every year. These loans are fixed for a certain number of years (3 or 5), then adjust after the initial period. These loans are usually best for borrowers who expect to move within three or five years. These types of adjustable rate loans are best for people who plan to move before the initial lock expires.
Most borrowers who choose ARMs do so when they want to take advantage of lower introductory rates and do not plan to remain in the home longer than this introductory low-rate period. ARMs can be risky if property values go down and borrowers are unable to sell their home or refinance their loan.
Have questions about mortgage loans? Call us at (718) 477-4405. We answer questions about different types of loans every day.