Differences between adjustable and fixed loans
A fixed-rate loan features the same payment for the entire duration of your mortgage. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but in general, payment amounts on fixed rate loans vary little.
At the beginning of a a fixed-rate loan, most of the payment goes toward interest. As you pay on the loan, more of your payment is applied to principal.
You can choose a fixed-rate loan to lock in a low interest rate. People select these types of loans because interest rates are low and they want to lock in at the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at the best rate currently available. Call Chris Caggiano - Grand Oaks Funding, LLC at (718) 477-4405 to learn more.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. Generally, interest on ARMs are determined by an outside index. Some examples of outside indexes are: the 6-month CD rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
The majority of Adjustable Rate Mortgages feature this cap, so they can't increase over a certain amount in a given period of time. Some ARMs can't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that ensures your payment won't go above a certain amount over the course of a given year. Additionally, the great majority of ARMs feature a "lifetime cap" — the interest rate won't exceed the capped percentage.
ARMs usually start at a very low rate that may increase over time. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then adjust. These loans are usually best for borrowers who anticipate moving in three or five years. These types of adjustable rate loans are best for borrowers who will move before the initial lock expires.
Most borrowers who choose ARMs choose them because they want to take advantage of lower introductory rates and don't plan to stay in the home longer than this initial low-rate period. ARMs can be risky in a down market because homeowners could be stuck with increasing rates when they can't sell their home or refinance at the lower property value.
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!