Adjustable versus fixed rate loans
With a fixed-rate loan, your monthly payment doesn't change for the life of your loan. The portion that goes to your principal (the amount you borrowed) will go up, but your interest payment will decrease in the same amount. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. For the most part payment amounts on a fixed-rate mortgage will increase very little.
Early in a fixed-rate loan, a large percentage of your payment goes toward interest, and a much smaller part goes to principal. The amount paid toward principal goes up slowly each month.
You can choose a fixed-rate loan in order to lock in a low rate. Borrowers choose fixed-rate loans when interest rates are low and they wish to lock in this 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 can help you lock in a fixed-rate at the best rate currently available. Call PREMIERE MORTGAGE SERVICES INC. at 978-422-2311 to learn more.
There are many types of Adjustable Rate Mortgages. Generally, interest rates for ARMs are determined by an outside index. Some examples of outside indexes are: the 6-month 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 are capped, so they won't increase over a certain 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 per year, even though the underlying index goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount the monthly payment can increase in one period. In addition, the great majority of ARMs feature a "lifetime cap" — this cap means that your rate can never exceed the cap percentage.
ARMs most often feature the lowest rates at the start of the loan. They usually guarantee that interest rate for an initial period that varies greatly. You've likely heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then they adjust after the initial period. Loans like this are best for people who anticipate moving in three or five years. These types of adjustable rate programs are best for borrowers who plan to sell their house or refinance before the initial lock expires.
Most people who choose ARMs choose them when they want to get lower introductory rates and do not plan on remaining in the house for any longer than this introductory low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up when they cannot sell or refinance at the lower property value.
Have questions about mortgage loans? Call us at 978-422-2311. It's our job to answer these questions and many others, so we're happy to help!