Differences between adjustable and fixed loans
A fixed-rate loan features the same payment over the life of the mortgage. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but generally, payment amounts on these types of loans don't increase much.
During the early amortization period of a fixed-rate loan, a large percentage of your monthly payment goes toward interest, and a much smaller percentage goes to principal. As you pay , more of your payment goes toward principal.
Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose fixed-rate loans when interest rates are low and they want to lock in the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at the best rate currently available. Call Chris Caggiano - Grand Oaks Funding, LLC at (718) 477-4405 to learn more.
There are many different kinds of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.
The majority of Adjustable Rate Mortgages feature this cap, so they won't go up over a specific amount in a given period of time. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that the monthly payment can go up in a given period. The majority of ARMs also cap your interest rate over the life of the loan.
ARMs most often have their lowest, most attractive rates toward the start. They usually provide the lower interest rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust. These loans are best for borrowers who expect to move within three or five years. These types of adjustable rate loans benefit people who plan to sell their house or refinance before the loan adjusts.
You might choose an Adjustable Rate Mortgage to take advantage of a very low initial rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs can be risky in a down market because homeowners could be stuck with rates that go up if they cannot 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!