Adjustable versus fixed loans
With a fixed-rate loan, your monthly payment stays the same for the life of your loan. The portion allocated for your principal (the loan amount) increases, however, the amount you pay in interest will go down in the same amount. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally payments on your fixed-rate loan will increase very little.
When you first take out a fixed-rate loan, most of the payment is applied to interest. As you pay , more of your payment is applied to principal.
Borrowers can choose a fixed-rate loan to lock in a low interest rate. Borrowers choose fixed-rate loans when interest rates are low and they wish to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at the best rate currently available. Call Omni Mortgage Company, Inc. at 603-893-6616 to discuss your situation with one of our professionals.
Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. 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 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 won't increase over a specified amount in a given period of time. Some ARMs won't adjust more than two percent 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 the payment can increase in a given period. Most ARMs also cap your rate over the duration of the loan period.
ARMs most often have their lowest rates at the start. They usually guarantee the lower interest rate from a month to ten years. You've probably heard of 5/1 or 3/1 ARMs. For these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are usually best for people who anticipate moving within three or five years. These types of adjustable rate programs benefit people who will sell their house or refinance before the loan adjusts.
Most borrowers who choose ARMs do so when they want to take advantage of lower introductory rates and don't plan to stay in the house longer than this initial low-rate period. ARMs can be risky if property values go down and borrowers are unable to sell or refinance their loan.
Have questions about mortgage loans? Call us at 603-893-6616. It's our job to answer these questions and many others, so we're happy to help!