Differences between adjustable and fixed rate loans
With a fixed-rate loan, your payment remains the same for the life of your mortgage. The portion that goes to your principal (the actual loan amount) will go up, however, your interest payment will go down in the same amount. The property tax and homeowners insurance will increase over time, but in general, payments on fixed rate loans don't increase much.
Your first few years of payments on a fixed-rate loan are applied mostly to pay interest. That reverses as the loan ages.
You might choose a fixed-rate loan in order to lock in a low rate. Borrowers select fixed-rate loans because interest rates are low and they want to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at a favorable rate. Call Nationwide Home Loans at 5626935048 to discuss your situation with one of our professionals.
There are many types of Adjustable Rate Mortgages. Generally, interest rates on ARMs are determined by a federal index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most ARMs feature this cap, which means they can't go up over a certain amount in a given period of time. Some ARMs can't increase more than 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that the monthly payment can go up in one period. Almost all ARMs also cap your rate over the life of the loan period.
ARMs usually start at a very low rate that usually increases over time. You've likely read about 5/1 or 3/1 ARMs. In these loans, the initial rate is fixed for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust. Loans like this are usually best for people who anticipate moving within three or five years. These types of adjustable rate loans are best for people who plan to move before the initial lock expires.
Most people who choose ARMs choose them when they want to take advantage of lower introductory rates and don't plan on remaining in the house for any longer than this initial low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates if they can't sell or refinance with a lower property value.
Have questions about mortgage loans? Call us at 5626935048. It's our job to answer these questions and many others, so we're happy to help!