Fixed versus adjustable rate loans
With a fixed-rate loan, your payment never changes for the entire duration of your loan. The amount that goes for your principal (the actual loan amount) will go up, but the amount you pay in interest will go down accordingly. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally monthly payments on your fixed-rate mortgage will increase very little.
When you first take out a fixed-rate mortgage loan, most of your payment goes toward interest. As you pay on the loan, more of your payment goes toward principal.
You might choose a fixed-rate loan to lock in a low rate. People select these types of loans when interest rates are low and they wish to lock in the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater stability 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 a favorable rate. Call Channel Mortgage LLC at (718) 639-9500 to learn more.
There are many different kinds of Adjustable Rate Mortgages. Generally, the interest for ARMs are determined by an outside index. A few of these are: the 6-month CD rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most Adjustable Rate Mortgages feature this cap, so they can't go up over a specific amount in a given period. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than a couple percent a year, even though the underlying index increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount the monthly payment can increase in a given period. Additionally, the great majority of adjustable programs feature a "lifetime cap" — this means that your interest rate will never exceed the cap 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 initial rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for a certain number of years (3 or 5), then adjust. These loans are usually best for borrowers who anticipate moving in three or five years. These types of ARMs benefit borrowers who will sell their house or refinance before the initial lock expires.
You might choose an Adjustable Rate Mortgage to get a lower introductory rate and count on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs are risky if property values go down and borrowers can't sell or refinance.
Have questions about mortgage loans? Call us at (718) 639-9500. It's our job to answer these questions and many others, so we're happy to help!