Fixed versus adjustable loans

A fixed-rate loan features the same payment for the entire duration of the loan. The property taxes and homeowners insurance will go up over time, but generally, payment amounts on these types of loans change little over the life of the loan.

Your first few years of payments on a fixed-rate loan go primarily toward interest. The amount applied to principal goes up gradually every month.

You can choose a fixed-rate loan in order to lock in a low rate. People select these types of loans when interest rates are low and they want to lock in this lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more consistency 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 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 even more varieties. Generally, the interest for ARMs are determined by an outside index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most Adjustable Rate Mortgages are capped, which means they won't increase above a specified amount in a given period of time. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than a couple percent a 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 rate directly, caps the amount your monthly payment can increase in one period. Plus, almost all adjustable programs have a "lifetime cap" — the rate won't go over the cap amount.

ARMs most often have the lowest, most attractive rates at the beginning. They usually provide the lower interest rate for an initial period that varies greatly. You've probably read about 5/1 or 3/1 ARMs. For these loans, the introductory rate is set for three or five years. It then adjusts every year. These kinds of loans are fixed for a number of years (3 or 5), then adjust after the initial period. These loans are usually best for people who expect to move in three or five years. These types of ARMs are best for borrowers who plan to sell their house or refinance before the initial lock expires.

Most borrowers who choose ARMs do so 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 are risky if property values go down and borrowers can't sell or refinance.

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!