Adjustable versus fixed rate loans

With a fixed-rate loan, your monthly payment remains the same for the life of the loan. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part payment amounts for a fixed-rate mortgage will increase very little.

During the early amortization period of a fixed-rate loan, most of your monthly payment goes toward interest, and a significantly smaller percentage goes to principal. The amount applied to principal goes up gradually every month.

Borrowers might choose a fixed-rate loan to lock in a low rate. People choose these types of loans when interest rates are low and they wish to lock in at this lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at a favorable rate. Call Chris Caggiano - Grand Oaks Funding, LLC at (718) 477-4405 for details.

Adjustable Rate Mortgages — ARMs, come in even more varieties. Generally, interest rates for ARMs are determined by an outside index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most Adjustable Rate Mortgages are capped, so they can't go up over a specific amount in a given period. 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 if 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 rate directly, caps the amount that the monthly payment can increase in a given period. Plus, the great majority of ARMs have a "lifetime cap" — your interest rate will never exceed the cap percentage.

ARMs usually start out at a very low rate that usually increases as the loan ages. You've likely read about 5/1 or 3/1 ARMs. For these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These kinds of loans are fixed for a certain number of years (3 or 5), then adjust. These loans are usually best for borrowers who anticipate moving within three or five years. These types of ARMs most benefit borrowers who plan to sell their house or refinance before the initial lock expires.

You might choose an ARM to get a lower initial interest rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky if property values decrease and borrowers cannot sell 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.

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