Adjustable versus fixed loans
A fixed-rate loan features a fixed payment amount for the entire duration of your loan. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but for the most part, payments on fixed rate loans don't increase much.
When you first take out a fixed-rate mortgage loan, the majority the payment is applied to interest. This proportion reverses itself as the loan ages.
Borrowers can choose a fixed-rate loan to lock in a low interest rate. People select these types of loans when interest rates are low and they want to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, 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 different kinds of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.
Most Adjustable Rate Mortgages are capped, which means they can't go up over a certain amount in a given period. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which guarantees that your payment will not go above a certain amount over the course of a given year. Additionally, the great majority of adjustable programs have a "lifetime cap" — this cap means that the rate will never exceed the cap amount.
ARMs most often feature their lowest rates toward the beginning of the loan. They provide the lower rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is set for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then adjust. Loans like this are best for people who expect to move in three or five years. These types of ARMs benefit people who plan to sell their house or refinance before the initial lock expires.
Most borrowers who choose ARMs do so when they want to take advantage of lower introductory rates and don't plan to remain in the home for any longer than the introductory low-rate period. ARMs can be risky if property values decrease and borrowers are unable to 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!