Differences between fixed and adjustable rate loans
A fixed-rate loan features the same payment amount for the entire duration of your loan. 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 these types of loans vary little.
During the early amortization period of a fixed-rate loan, most of your monthly payment pays interest, and a much smaller part toward principal. As you pay , more of your payment goes toward principal.
You might choose a fixed-rate loan in order to lock in a low rate. People select fixed-rate loans when 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 offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at the best rate currently available. Call Channel Mortgage LLC at (718) 639-9500 for details.
There are many different types of Adjustable Rate Mortgages. Generally, the interest on ARMs are based on an outside index. A few of these are: the 6-month Certificate of Deposit (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 have a cap that protects borrowers from sudden monthly payment increases. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than two percent a year, even if the underlying index 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 payment can increase in a given period. Almost all ARMs also cap your interest rate over the life of the loan period.
ARMs most often feature their lowest rates toward the beginning of the loan. They usually guarantee 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 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. Loans like this are usually best for borrowers who expect to move within three or five years. These types of adjustable rate loans are best for people who will move before the initial lock expires.
Most borrowers who choose ARMs choose them when they want to get lower introductory rates and do not plan to stay in the home longer than the introductory low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates when they can't sell or refinance at the lower property value.
Have questions about mortgage loans? Call us at (718) 639-9500. We answer questions about different types of loans every day.