Fixed versus adjustable loans
A fixed-rate loan features the same payment amount for the entire duration of the mortgage. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part payment amounts for your fixed-rate mortgage will increase very little.
At the beginning of a a fixed-rate mortgage loan, the majority your payment is applied to interest. As you pay , more of your payment goes toward principal.
Borrowers can choose a fixed-rate loan in order to lock in a low rate. People choose fixed-rate loans because interest rates are low and they wish to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more monthly payment stability. 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 Channel Mortgage LLC at (718) 639-9500 to learn more.
There are many different kinds of Adjustable Rate Mortgages. ARMs are generally adjusted every six months, based on various indexes.
Most Adjustable Rate Mortgages are capped, which means they can't increase over a certain amount in a given period of time. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount the monthly payment can go up in one period. In addition, the great majority of ARMs feature a "lifetime cap" — your rate can't exceed the capped amount.
ARMs usually start at a very low rate that may increase over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is set for three or five years. It then adjusts every year. These types of loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are usually best for borrowers who anticipate moving in three or five years. These types of adjustable rate loans are best for people who will sell their house or refinance before the loan adjusts.
You might choose an Adjustable Rate Mortgage to take advantage of a lower introductory rate and count on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates if they cannot 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.