Adjustable versus fixed loans
With a fixed-rate loan, your monthly payment doesn't change for the life of your loan. The portion of the payment allocated for principal (the actual loan amount) goes up, but your interest payment will go down accordingly. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but for the most part, payment amounts on fixed rate loans vary little.
During the early amortization period of a fixed-rate loan, most of your monthly payment pays interest, and a much smaller percentage goes to principal. The amount applied to principal goes up gradually each month.
Borrowers might 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 lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at a favorable rate. Call Chris Caggiano - Grand Oaks Funding, LLC at (718) 477-4405 to learn more.
There are many kinds of Adjustable Rate Mortgages. Generally, interest on ARMs are determined by a federal index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most Adjustable Rate Mortgages are capped, which means they can't increase over a specific amount in a given period. Some ARMs can't increase more than 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount your monthly payment can go up in one period. Plus, almost all ARMs feature a "lifetime cap" — the interest rate can't go over the cap amount.
ARMs most often have their lowest, most attractive rates toward the start of the loan. They usually guarantee that rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is set for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are often best for borrowers 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 initial lock expires.
You might choose an ARM to take advantage of a lower introductory interest rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs can be risky if property values go down and borrowers cannot sell or refinance.
Have questions about mortgage loans? Call us at (718) 477-4405. We answer questions about different types of loans every day.