Differences between fixed and adjustable loans
With a fixed-rate loan, your payment never changes for the life of the loan. The amount that goes to your principal (the loan amount) will go up, however, the amount you pay in interest will decrease in the same amount. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but generally, payment amounts on these types of loans don't increase much.
Your first few years of payments on a fixed-rate loan are applied primarily to pay interest. As you pay , more of your payment goes toward principal.
You might choose a fixed-rate loan in order to lock in a low interest rate. People choose these types of loans because interest rates are low and they want to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more monthly payment stability. 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 Refresh Funding at 305-800-3863 for details.
There are many different kinds of Adjustable Rate Mortgages. Generally, the 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.
The majority of Adjustable Rate Mortgages are capped, so they won't go up above a specified amount in a given period. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount your monthly payment can go up in one period. Most ARMs also cap your interest rate over the duration of the loan period.
ARMs most often feature the lowest rates at the beginning of the loan. They usually provide the lower rate from a month to ten years. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set for three or five years. It then adjusts every year. These kinds of loans are fixed for a certain number of years (3 or 5), then adjust. Loans like this are often best for people who anticipate moving in three or five years. These types of ARMs most benefit borrowers who will sell their house or refinance before the loan adjusts.
Most borrowers who choose ARMs choose them when they want to take advantage of lower introductory rates and don't plan to stay in the home longer than the introductory low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates if they cannot sell their home or refinance with a lower property value.
Have questions about mortgage loans? Call us at 305-800-3863. We answer questions about different types of loans every day.