Differences between adjustable and fixed rate loans
With a fixed-rate loan, your monthly payment doesn't change for the entire duration of your mortgage. The amount that goes to principal (the loan amount) will go up, but your interest payment will go down in the same amount. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally payment amounts on your fixed-rate loan will be very stable.
At the beginning of a a fixed-rate loan, most of your payment is applied to interest. As you pay on the loan, more of your payment is applied to principal.
Borrowers can choose a fixed-rate loan to lock in a low rate. Borrowers choose 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 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 for details.
Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, the interest rates for ARMs are determined by a federal index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
The majority of ARMs feature this cap, so they won't increase 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. Sometimes an ARM features a "payment cap" which guarantees that your payment can't go above a certain amount over the course of a given year. Plus, almost all adjustable programs have a "lifetime cap" — this means that the rate can never exceed the capped percentage.
ARMs usually start at a very low rate that may increase as the loan ages. You've likely heard of 5/1 or 3/1 ARMs. In these loans, the initial rate is fixed for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are usually best for people who anticipate moving within three or five years. These types of adjustable rate loans benefit people who will move before the initial lock expires.
Most people who choose ARMs do so because they want to get lower introductory rates and do not plan on remaining in the house for any longer than this initial low-rate period. ARMs can be risky when property values go down and borrowers can't sell or refinance.
Have questions about mortgage loans? Call us at (718) 639-9500. We answer questions about different types of loans every day.