Adjustable versus fixed rate loans

With a fixed-rate loan, your monthly payment remains the same for the entire duration of the loan. The amount of the payment allocated to principal (the actual loan amount) will go up, but your interest payment will go down accordingly. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but generally, payments on fixed rate loans don't increase much.

During the early amortization period of a fixed-rate loan, a large percentage of your payment pays interest, and a significantly smaller part toward 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 choose these types of loans when interest rates are low and they wish to lock in the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad 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, interest rates on ARMs are based on a federal index. A few of these are: the 6-month CD rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARM programs have a "cap" that protects borrowers from sudden increases in monthly payments. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than two percent a year, even though the underlying index increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount your monthly payment can increase in a given period. Plus, almost all adjustable programs have a "lifetime cap" — this cap means that your interest rate can't go over the cap amount.

ARMs most often feature their lowest rates toward the beginning. They usually provide the lower rate for an initial period that varies greatly. You've likely read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are usually best for borrowers who expect to move in three or five years. These types of ARMs are best for people who plan to 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 remain in the home longer than the introductory low-rate period. ARMs can be risky if property values go down and borrowers cannot sell their home or refinance.

Have questions about mortgage loans? Call us at (718) 639-9500. We answer questions about different types of loans every day.

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