Differences between adjustable and fixed loans
With a fixed-rate loan, your monthly payment stays the same for the life of the mortgage. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally payments for your fixed-rate mortgage will be very stable.
During the early amortization period of a fixed-rate loan, a large percentage of your monthly payment pays interest, and a significantly smaller percentage goes to principal. As you pay on the loan, more of your payment goes toward principal.
You can choose a fixed-rate loan in order to lock in a low interest rate. People choose fixed-rate loans because interest rates are low and they wish to lock in at the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater consistency 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 7186399500 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. A few of these are: the 6-month Certificate of Deposit (CD) rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most ARMs are capped, so they can't increase over a specific amount in a given period. There may be a cap on how much your interest rate can increase in one period. For example: no more than two percent a year, even if the underlying index increases by more than two percent. Sometimes an ARM features a "payment cap" that ensures that your payment will not go above a certain amount over the course of a given year. Most ARMs also cap your interest rate over the duration of the loan.
ARMs most often feature their lowest rates toward the start of the loan. They guarantee the lower interest rate for an initial period that varies greatly. You've likely heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. It then adjusts every year. These types of loans are fixed for 3 or 5 years, then they adjust. These loans are best for borrowers who expect to move within three or five years. These types of adjustable rate programs benefit borrowers who plan to move before the loan adjusts.
You might choose an Adjustable Rate Mortgage to get a very low introductory rate and count on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs can be risky when property values go down and borrowers are unable to sell or refinance their loan.
Have questions about mortgage loans? Call us at 7186399500. It's our job to answer these questions and many others, so we're happy to help!