Fixed versus adjustable rate loans

A fixed-rate loan features the same payment amount for the entire duration of the mortgage. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally monthly payments on a fixed-rate mortgage will be very stable.

Early in a fixed-rate loan, a large percentage of your payment pays interest, and a much smaller percentage toward principal. As you pay on the loan, more of your payment is applied to principal.

You can choose a fixed-rate loan in order to lock in a low rate. People select these types of loans because interest rates are low and they wish to lock in at this lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more stability in monthly payments. 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.

There are many different kinds of Adjustable Rate Mortgages. Generally, interest on ARMs are determined by a federal index. A few of these are: the 6-month CD rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most Adjustable Rate Mortgages are capped, so they won't go up above a specific amount in a given period of time. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount that the monthly payment can increase in one period. Plus, almost all ARMs have a "lifetime cap" — this means that the interest rate can't go over the capped amount.

ARMs most often feature their lowest rates at the beginning. They usually guarantee that rate for an initial period that varies greatly. You've probably heard of 5/1 or 3/1 ARMs. For these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These kinds of loans are fixed for a certain number of years (3 or 5), then they adjust. These loans are usually best for people who expect to move in three or five years. These types of adjustable rate loans benefit people who plan to sell their house or refinance before the initial lock expires.

You might choose an ARM to take advantage of a very low introductory rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates if they can't sell their home or refinance at the lower property value.

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!

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