Adjustable versus fixed rate loans
With a fixed-rate loan, your payment stays the same for the entire duration of the loan. The portion allocated to your principal (the loan amount) goes up, however, the amount you pay in interest will decrease accordingly. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but generally, payments on these types of loans change little over the life of the loan.
When you first take out a fixed-rate mortgage loan, the majority the payment is applied to interest. That reverses as the loan ages.
You might choose a fixed-rate loan in order to lock in a low rate. Borrowers select these types of loans because interest rates are low and they want to lock in the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at a good rate. Call Kelly Mortgage Center at 800-800-6020 for details.
There are many different types of Adjustable Rate Mortgages. Generally, the interest for ARMs are based on an outside index. Some examples of outside indexes are: the 6-month CD rate, the one-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, which means they won't go up over a specific amount in a given period. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than two percent per year, even if the index the rate is based on increases by more than two percent. Sometimes an ARM features a "payment cap" that ensures that your payment will not increase beyond a certain amount in a given year. The majority of ARMs also cap your interest rate over the life of the loan period.
ARMs usually start out at a very low rate that may increase over time. You've probably read about 5/1 or 3/1 ARMs. For these loans, the initial 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. Loans like this are often best for people who anticipate moving in three or five years. These types of ARMs are best for people who will move before the loan adjusts.
Most people who choose ARMs choose them because they want to get lower introductory rates and don't plan on staying in the home for any longer than the initial low-rate period. ARMs can be risky in a down market because homeowners can get stuck with increasing rates if they can't sell their home or refinance with a lower property value.
Have questions about mortgage loans? Call us at 800-800-6020. It's our job to answer these questions and many others, so we're happy to help!