Adjustable versus fixed rate loans
A fixed-rate loan features the same payment amount for the entire duration of your mortgage. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally monthly payments for a fixed-rate mortgage will increase very little.
Your first few years of payments on a fixed-rate loan go primarily toward interest. As you pay , more of your payment is applied to principal.
You can choose a fixed-rate loan in order to lock in a low rate. Borrowers choose fixed-rate loans because interest rates are low and they wish to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater consistency 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 good rate. 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 for ARMs are determined by a federal index. A few of these are: the 6-month 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 ARMs feature this cap, so they won't go up above a specified amount in a given period of time. There may be a cap on interest rate variances over the course of a year. For example: no more than a couple percent a year, even if the underlying index goes up by more than two percent. Sometimes an ARM has a "payment cap" which guarantees your payment can't increase beyond a certain amount in a given year. Almost all ARMs also cap your interest rate over the duration of the loan period.
ARMs usually start out at a very low rate that usually increases as the loan ages. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are usually best for people who anticipate moving within three or five years. These types of adjustable rate loans benefit people who will move before the initial lock expires.
You might choose an ARM to take advantage of a very low initial interest rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. ARMs can be risky in a down market because homeowners can get stuck with rates that go up when they cannot sell their home or refinance at the lower property value.
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!