Differences between fixed and adjustable rate loans
A fixed-rate loan features a fixed payment amount for the entire duration of the loan. The property taxes and homeowners insurance will increase over time, but generally, 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 significantly smaller part goes to principal. This proportion gradually reverses itself as the loan ages.
Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. People select these types of loans when interest rates are low and they wish 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 good rate. Call Chris Caggiano - Grand Oaks Funding, LLC at (718) 477-4405 to discuss how we can help.
There are many kinds of Adjustable Rate Mortgages. Generally, interest for ARMs are based on a federal index. A few of these are: the 6-month CD rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most programs feature a cap that protects borrowers from sudden increases in monthly payments. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that guarantees that your payment will not increase beyond a fixed amount in a given year. The majority of ARMs also cap your interest rate over the life of the loan period.
ARMs usually start at a very low rate that usually increases as the loan ages. 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 a number of years (3 or 5), then they adjust after the initial period. Loans like this are usually best for borrowers who expect to move in three or five years. These types of adjustable rate programs most benefit people who plan to move 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 absorbing the higher rate after the initial rate expires. ARMs are risky when property values go down and borrowers are unable to 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!