Fixed versus adjustable loans
With a fixed-rate loan, your monthly payment doesn't change for the entire duration of the mortgage. The longer you pay, the more of your payment goes toward principal. 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 these types of loans change little over the life of the loan.
When you first take out a fixed-rate loan, the majority the payment is applied to interest. The amount paid toward principal goes up slowly every month.
You can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose these types of loans when interest rates are low and they wish to lock in at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more stability in monthly payments. 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 Greystone Loans, Inc. at 9094671090 for details.
There are many kinds of Adjustable Rate Mortgages. Generally, interest for ARMs are determined by an outside index. Some examples of outside indexes 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.
The majority of ARMs are capped, which means they won't increase above a certain 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 though the index the rate is based on goes up by more than two percent. Sometimes an ARM features a "payment cap" that guarantees that your payment will not go above a fixed amount over the course of a given year. The majority of ARMs also cap your interest rate over the life of the loan.
ARMs most often have their lowest rates toward the beginning. They usually guarantee the lower rate for an initial period that varies greatly. 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. It then adjusts every year. These loans are fixed for a certain number of years (3 or 5), then adjust after the initial period. Loans like this are often best for borrowers who anticipate moving in three or five years. These types of adjustable rate loans are best for borrowers who will move before the loan adjusts.
Most people who choose ARMs choose them when they want to get lower introductory rates and do not plan on staying 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 when they cannot sell their home or refinance at the lower property value.
Have questions about mortgage loans? Call us at 9094671090. It's our job to answer these questions and many others, so we're happy to help!