Differences between adjustable and fixed loans
A fixed-rate loan features the same payment amount over the life of your loan. The property taxes and homeowners insurance will increase over time, but in general, payment amounts on these types of loans change little over the life of the loan.
During the early amortization period of a fixed-rate loan, a large percentage of your payment pays interest, and a significantly smaller percentage toward principal. The amount paid toward principal increases up slowly each month.
You can choose a fixed-rate loan in order to lock in a low interest rate. People choose these types of 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 offer more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at the best rate currently available. Call South County Mortgage at (401) 583-4150 to learn more.
There are many different types of Adjustable Rate Mortgages. Generally, interest on ARMs are based on a federal index. A few of these are: the 6-month CD rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most programs have a "cap" that protects you from sudden increases in monthly payments. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than a couple percent per year, even though the index the rate is based on increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount the monthly payment can increase in a given period. Plus, almost all ARM programs have a "lifetime cap" — your rate can't go over the capped amount.
ARMs usually start out at a very low rate that may increase as the loan ages. You've likely read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These types of loans are fixed for a certain number of years (3 or 5), then they adjust after the initial period. These loans are usually best for borrowers who expect to move in three or five years. These types of adjustable rate programs most benefit borrowers who will move before the initial lock expires.
Most borrowers who choose ARMs choose them because they want to take advantage of lower introductory rates and do not plan on staying in the house for any longer than the initial low-rate period. ARMs are risky when property values go down and borrowers can't sell or refinance.
Have questions about mortgage loans? Call us at (401) 583-4150. It's our job to answer these questions and many others, so we're happy to help!