Differences between adjustable and fixed rate loans
A fixed-rate loan features a fixed payment amount over the life of the mortgage. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally payment amounts on a fixed-rate mortgage will increase very little.
At the beginning of a a fixed-rate mortgage loan, most of the payment goes toward interest. As you pay , more of your payment goes toward principal.
You might choose a fixed-rate loan in order to lock in a low rate. People select these types of loans when interest rates are low and they wish to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, 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 to discuss your situation with one of our professionals.
There are many different kinds of Adjustable Rate Mortgages. Generally, the interest on ARMs are determined by a federal index. Some examples of outside indexes 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 ARM programs have a "cap" that protects borrowers from sudden increases in monthly payments. There may be a cap on interest rate variances over the course of a year. For example: no more than a couple percent per year, even though the index the rate is based on goes up by more than two percent. Sometimes an ARM has a "payment cap" that ensures your payment can't go above a certain amount in a given year. The majority of ARMs also cap your rate over the duration of the loan period.
ARMs usually start at a very low rate that usually increases over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust. Loans like this are often best for people who anticipate moving in three or five years. These types of adjustable rate loans benefit people who plan to sell their house or refinance before the loan adjusts.
Most borrowers who choose ARMs do so when they want to get lower introductory rates and don't plan on staying in the home longer than the initial low-rate period. ARMs can be risky in a down market because homeowners can get stuck with rates that go up when they can't sell 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!