Fixed versus adjustable rate loans
With a fixed-rate loan, your monthly payment doesn't change for the entire duration of your loan. The portion that goes to principal (the amount you borrowed) will go up, but the amount you pay in interest will go down accordingly. The property tax and homeowners insurance will go up over time, but generally, payments on these types of loans vary little.
At the beginning of a a fixed-rate loan, the majority the payment is applied to interest. This proportion gradually reverses itself as the loan ages.
Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. People select these types of loans because interest rates are low and they want to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at a good rate. Call Omni Mortgage Company, Inc. at 603-893-6616 for details.
There are many different types of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.
Most ARM programs feature a cap that protects you from sudden monthly payment increases. Some ARMs can't increase more than 2% 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 your monthly payment can go up in a given period. Most ARMs also cap your interest rate over the duration of the loan.
ARMs usually start out at a very low rate that usually increases over time. 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 types of loans are fixed for a certain number of years (3 or 5), then adjust. Loans like this are often best for people who anticipate moving within three or five years. These types of adjustable rate loans are best for people who plan to sell their house or refinance before the initial lock expires.
Most people who choose ARMs choose them because they want to take advantage of lower introductory rates and don't plan to stay in the house for any longer than the initial low-rate period. ARMs can be risky in a down market because homeowners could be stuck with rates that go up if they can't 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!