Differences between adjustable and fixed rate loans
With a fixed-rate loan, your monthly payment stays the same for the life of your mortgage. The portion allocated to your principal (the loan amount) increases, however, the amount you pay in interest will decrease in the same amount. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but in general, payments on these types of loans change little over the life of the loan.
At the beginning of a a fixed-rate mortgage loan, most of the payment goes toward interest. As you pay on the loan, more of your payment goes toward principal.
You can choose a fixed-rate loan in order to lock in a low rate. Borrowers select these types of loans because interest rates are low and they want to lock in at this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at the best rate currently available. Call Moonstar Mortgage at 847-278-7220 to learn more.
There are many different types of Adjustable Rate Mortgages. Generally, the interest rates for ARMs are determined by a federal index. Some examples of outside indexes 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 programs feature a "cap" that protects you from sudden monthly payment increases. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount your monthly payment can increase in a given period. The majority of ARMs also cap your rate over the duration of the loan period.
ARMs most often feature their lowest rates toward the beginning. They provide that interest rate from a month to ten years. You've likely read about 5/1 or 3/1 ARMs. In these loans, the initial rate is set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are usually best for people who anticipate moving in three or five years. These types of ARMs most benefit people who will sell their house or refinance before the loan adjusts.
Most people who choose ARMs choose them because they want to get lower introductory rates and do not plan on remaining in the home for any longer than the initial low-rate period. ARMs can be risky when property values decrease and borrowers cannot sell their home or refinance their loan.
Have questions about mortgage loans? Call us at 847-278-7220. It's our job to answer these questions and many others, so we're happy to help!