Fixed versus adjustable loans
With a fixed-rate loan, your monthly payment never changes for the life of the loan. The amount allocated to your principal (the amount you borrowed) will go up, but your interest payment will go down in the same amount. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally payment amounts on your fixed-rate mortgage will increase very little.
During the early amortization period of a fixed-rate loan, most of your payment pays interest, and a much smaller part toward principal. As you pay on the loan, more of your payment is applied to principal.
Borrowers might choose a fixed-rate loan to lock in a low rate. People select fixed-rate loans because interest rates are low and they want to lock in this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at a good rate. Call Queen City Mortgage Company, LLC at 5137966020 to discuss your situation with one of our professionals.
There are many different types of Adjustable Rate Mortgages. Generally, interest rates for ARMs are determined by an outside index. A few of these 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, so they won't increase above a specific amount in a given period of time. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than a couple percent a year, even though the underlying index goes up by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that the payment can go up in one period. In addition, almost all ARM programs feature a "lifetime cap" — your rate can never exceed the capped percentage.
ARMs most often have the lowest rates at the start of the loan. They guarantee the lower interest rate for an initial period that varies greatly. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust after the initial period. These loans are usually best for people who anticipate moving in three or five years. These types of ARMs are best for people who plan to move before the loan adjusts.
You might choose an Adjustable Rate Mortgage to take advantage of a lower initial interest rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs are risky if property values decrease and borrowers can't sell or refinance their loan.
Have questions about mortgage loans? Call us at 5137966020. We answer questions about different types of loans every day.