Fixed versus adjustable loans
With a fixed-rate loan, your payment doesn't change for the life of your loan. The amount of the payment allocated to your principal (the amount you borrowed) increases, however, your interest payment will decrease accordingly. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part payments on your fixed-rate mortgage will increase very little.
When you first take out a fixed-rate loan, the majority your payment goes toward interest. As you pay on the loan, more of your payment is applied to principal.
Borrowers can choose a fixed-rate loan to lock in a low interest rate. Borrowers select these types of loans when interest rates are low and they want to lock in this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at a favorable rate. Call C2 Financial Corporation at 5622061550 to discuss how we can help.
There are many different kinds of Adjustable Rate Mortgages. Generally, the interest on ARMs are determined by an outside index. A few of these 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.
The majority of ARMs are capped, so they can't go up over 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 two percent a year, even if the index the rate is based on increases by more than two percent. Sometimes an ARM features a "payment cap" which guarantees that your payment can't increase beyond a fixed amount in a given year. Additionally, almost all adjustable programs have a "lifetime cap" — the rate won't go over the capped percentage.
ARMs most often feature the lowest, most attractive rates at the start of the loan. They provide that interest rate for an initial period that varies greatly. You've probably read about 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. It then adjusts every year. These loans are fixed for a certain number of years (3 or 5), then adjust after the initial period. Loans like this are often best for people who expect to move within three or five years. These types of adjustable rate loans most benefit borrowers who plan to sell their house or refinance before the initial lock expires.
Most people who choose ARMs do so when they want to get lower introductory rates and do not plan on staying in the house for any longer than this introductory low-rate period. ARMs can be risky in a down market because homeowners could be stuck with increasing rates when they cannot sell or refinance with a lower property value.
Have questions about mortgage loans? Call us at 5622061550. We answer questions about different types of loans every day.