Adjustable versus fixed loans

With a fixed-rate loan, your payment never changes for the entire duration of your mortgage. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but for the most part, payment amounts on fixed rate loans don't increase much.

During the early amortization period of a fixed-rate loan, most of your monthly payment pays interest, and a much smaller part toward principal. 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 select these types of loans because interest rates are low and they wish to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater monthly payment stability. 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 for details.

There are many different kinds of Adjustable Rate Mortgages. Generally, the interest rates for ARMs are determined by an outside index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARM programs feature a cap that protects borrowers from sudden monthly payment increases. Some ARMs won't adjust more than 2% 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 that the payment can increase in a given period. The majority of ARMs also cap your interest rate over the duration of the loan period.

ARMs most often have their lowest rates toward the beginning of the loan. They usually guarantee that rate for an initial period that varies greatly. You may hear people talking about "3/1 ARMs" or "5/1 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 a number of years (3 or 5), then they adjust after the initial period. These loans are often best for people who anticipate moving within three or five years. These types of adjustable rate programs benefit borrowers who will sell their house or refinance before the loan adjusts.

You might choose an ARM to take advantage of a lower introductory interest rate and count on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs can be risky when property values decrease and borrowers cannot sell or refinance their loan.

Have questions about mortgage loans? Call us at 603-893-6616. We answer questions about different types of loans every day.