Differences between adjustable and fixed loans
With a fixed-rate loan, your payment doesn't change for the life of your mortgage. The longer you pay, the more of your payment goes toward principal. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally payment amounts on your fixed-rate loan will be very stable.
Early in a fixed-rate loan, a large percentage of your monthly payment pays interest, and a much smaller part goes to principal. As you pay on the loan, more of your payment is applied to principal.
You might choose a fixed-rate loan to lock in a low interest rate. Borrowers choose fixed-rate loans because interest rates are low and they want to lock in the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to 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 different kinds of Adjustable Rate Mortgages. Generally, interest for ARMs are determined by an outside index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the one-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 increase above a specified amount in a given period. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than two percent a year, even though the underlying index increases by more than two percent. Sometimes an ARM features a "payment cap" which guarantees your payment will not go above a certain amount in a given year. Almost all ARMs also cap your interest rate over the duration of the loan period.
ARMs most often have their lowest rates toward the start of the loan. They usually provide the lower rate for an initial period that varies greatly. You may hear people talking about "3/1 ARMs" or "5/1 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 certain number of years (3 or 5), then they adjust after the initial period. These loans are often best for borrowers who expect to move within three or five years. These types of ARMs most benefit people who will move before the initial lock expires.
You might choose an Adjustable Rate Mortgage to get a lower introductory interest rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs are risky if property values go down and borrowers can't sell their home or refinance.
Have questions about mortgage loans? Call us at 978-422-2311. We answer questions about different types of loans every day.