Adjustable versus fixed loans

A fixed-rate loan features the same payment for the entire duration of the mortgage. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but for the most part, payments on fixed rate loans vary little.

Your first few years of payments on a fixed-rate loan are applied primarily to pay interest. The amount applied to your principal amount increases up gradually each month.

You might choose a fixed-rate loan to lock in a low interest rate. People choose these types of loans because interest rates are low and they want to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call Omni Mortgage Company, Inc.
NMLS#: 1954 at 6038936616 to learn more.

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

Most ARM programs have a cap that protects borrowers from sudden increases in monthly payments. Some ARMs can't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which ensures that your payment won't go above a fixed amount over the course of a given year. In addition, almost all ARMs feature a "lifetime cap" — this means that the rate won't go over the cap amount.

ARMs usually start at a very low rate that usually increases over time. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set 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 they adjust. Loans like this are usually best for people who anticipate moving within three or five years. These types of ARMs are best for borrowers who will sell their house or refinance before the loan adjusts.

Most people who choose ARMs do so when they want to take advantage of lower introductory rates and do not plan to remain in the home longer than this initial low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates if they cannot sell or refinance at the lower property value.

Have questions about mortgage loans? Call us at 6038936616. We answer questions about different types of loans every day.


Omni Mortgage Company, Inc.
NMLS#: 1954

Michael Loffredo NMLS 12192

224 Main Street Suite 1A
Salem, NH 03079-3187