Adjustable versus fixed rate loans
With a fixed-rate loan, your monthly payment doesn't change for the life of the mortgage. The longer you pay, the more of your payment goes toward principal. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally payments for your fixed-rate mortgage will increase very little.
At the beginning of a a fixed-rate mortgage loan, most of your payment goes toward interest. The amount applied to principal increases up slowly each month.
You might choose a fixed-rate loan to lock in a low rate. Borrowers choose these types of loans when interest rates are low and they want to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at the best rate currently available. Call Nationwide Home Loans at 5626935048 to discuss how we can help.
There are many kinds of Adjustable Rate Mortgages. Generally, interest rates on ARMs are based on an outside index. A few of these are: the 6-month Certificate of Deposit (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 increase above a specified amount in a given period of time. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than two percent per year, even if the index the rate is based on increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount your payment can increase in one period. Plus, almost all ARMs feature a "lifetime cap" — this cap means that your interest rate won't go over the capped amount.
ARMs most often have the lowest rates at the beginning. They guarantee that interest rate for an initial period that varies greatly. 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 types of loans are fixed for a certain number of years (3 or 5), then they adjust after the initial period. These loans are best for people who expect to move in three or five years. These types of adjustable rate loans benefit borrowers who will move before the loan adjusts.
You might choose an Adjustable Rate Mortgage to take advantage of a lower introductory rate and count on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up if they can't sell or refinance with a lower property value.
Have questions about mortgage loans? Call us at 5626935048. We answer questions about different types of loans every day.