Differences between adjustable and fixed rate loans
With a fixed-rate loan, your monthly payment stays the same for the entire duration of your mortgage. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but for the most part, payment amounts on these types of loans don't increase much.
Your first few years of payments on a fixed-rate loan are applied mostly to pay interest. That gradually reverses as the loan ages.
You can choose a fixed-rate loan in order to lock in a low rate. Borrowers choose these types of loans when interest rates are low and they want to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at the best rate currently available. Call Metro Mortgage at 866-300-1550 to discuss how we can help.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. Generally, the interest rates on ARMs are determined by a federal index. Some examples of outside indexes are: the 6-month 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 ARM programs have a "cap" that protects you from sudden increases in monthly payments. Some ARMs can't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which ensures your payment won't increase beyond a fixed amount in a given year. Additionally, almost all ARMs have a "lifetime cap" — the interest rate will never exceed the capped percentage.
ARMs most often feature their lowest rates at the beginning of the loan. They usually provide the lower rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are often best for people who anticipate moving within three or five years. These types of ARMs are best for people who plan to sell their house or refinance before the initial lock expires.
You might choose an ARM to get a very low introductory rate and plan on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs are risky when property values decrease and borrowers cannot sell their home or refinance.
Have questions about mortgage loans? Call us at 866-300-1550. It's our job to answer these questions and many others, so we're happy to help!