Fixed versus adjustable loans
With a fixed-rate loan, your payment remains the same for the life of your mortgage. The portion allocated for your principal (the actual loan amount) will go up, however, your interest payment will go down accordingly. The property tax and homeowners insurance will increase over time, but generally, payments on fixed rate loans don't increase much.
When you first take out a fixed-rate loan, most of the payment goes toward interest. As you pay , more of your payment goes toward principal.
Borrowers can choose a fixed-rate loan in order to lock in a low rate. Borrowers select fixed-rate loans because interest rates are low and they wish to lock in this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call Omni Mortgage Company, Inc. at 603-893-6616 to learn more.
There are many different kinds of Adjustable Rate Mortgages. Generally, the interest for ARMs are determined by a federal 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.
Most programs feature a cap that protects borrowers from sudden increases in monthly payments. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that your monthly payment can increase in one period. Almost all ARMs also cap your rate over the duration of the loan.
ARMs most often have the lowest, most attractive rates at the start. They provide that rate for an initial period that varies greatly. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the initial rate is fixed 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. Loans like this are usually best for people who expect to move within three or five years. These types of ARMs most benefit people who will move before the loan adjusts.
Most borrowers who choose ARMs do so because they want to take advantage of lower introductory rates and do not plan on staying in the home for any longer than this introductory low-rate period. ARMs can be risky when housing prices go down 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 603-893-6616. It's our job to answer these questions and many others, so we're happy to help!