Fixed versus adjustable rate loans
With a fixed-rate loan, your monthly payment stays the same for the life of your mortgage. The longer you pay, the more of your payment goes toward principal. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally payments for a fixed-rate mortgage will increase very little.
Your first few years of payments on a fixed-rate loan go mostly toward interest. As you pay on the loan, more of your payment goes toward principal.
You can choose a fixed-rate loan to lock in a low interest rate. People select these types of loans because interest rates are low and they wish to lock in the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at a favorable rate. Call Omni Mortgage Company, Inc. at 603-893-6616 for details.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. ARMs are generally adjusted every six months, based on various indexes.
The majority of Adjustable Rate Mortgages feature this cap, so they won't go up over a specified amount in a given period. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than two percent per 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 rate directly, caps the amount that your payment can go up in a given period. The majority of ARMs also cap your interest rate over the duration of the loan.
ARMs usually start at a very low rate that usually increases over time. You've probably heard of 5/1 or 3/1 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 3 or 5 years, then adjust. Loans like this are best for people who anticipate moving in three or five years. These types of adjustable rate programs benefit people who plan to move before the initial lock expires.
You might choose an ARM to take advantage of a very low introductory rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky in a down market because homeowners can get stuck with increasing rates when they can't sell their home or refinance with a lower property value.
Have questions about mortgage loans? Call us at 603-893-6616. We answer questions about different types of loans every day.