Differences between adjustable and fixed loans
With a fixed-rate loan, your monthly payment remains the same for the entire duration of your loan. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance will go up over time, but for the most part, payment amounts on fixed rate loans don't increase much.
Your first few years of payments on a fixed-rate loan are applied primarily toward interest. The amount paid toward your principal amount increases up gradually each month.
Borrowers can choose a fixed-rate loan in order to lock in a low rate. People select these types of loans because interest rates are low and they want to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at the best rate currently available. Call Omni Mortgage Company, Inc. at 603-893-6616 to discuss how we can help.
There are many types of Adjustable Rate Mortgages. Generally, the interest rates for ARMs are determined by a federal index. A few of these 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 Adjustable Rate Mortgages feature this cap, so they won't increase over a specific amount in a given period. There may be a cap on interest rate increases over the course of a year. For example: no more than a couple percent a year, even if the index the rate is based on goes up by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that your monthly payment can go up in a given period. In addition, almost all ARMs feature a "lifetime cap" — this cap means that your interest rate won't go over the cap percentage.
ARMs most often feature their lowest, most attractive rates at the beginning. They guarantee that rate from a month to ten years. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is fixed 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 adjust after the initial period. Loans like this are often best for borrowers who anticipate moving in three or five years. These types of adjustable rate programs benefit people who plan to move before the loan adjusts.
Most borrowers who choose ARMs do so because they want to get lower introductory rates and don't plan on remaining in the house longer than this initial low-rate period. ARMs are risky if property values go down and borrowers can't sell their home 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!