Adjustable versus fixed loans
With a fixed-rate loan, your monthly payment doesn't change for the life of the loan. The amount that goes to principal (the actual loan amount) goes up, but your interest payment will decrease in the same amount. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally payments on a fixed-rate mortgage will increase very little.
Your first few years of payments on a fixed-rate loan are applied mostly to pay interest. The amount applied to your principal amount goes up gradually each month.
You might choose a fixed-rate loan to lock in a low rate. Borrowers select these types of loans because interest rates are low and they wish to lock in at this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more monthly payment stability. 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 Triumph Mortgage Inc at 8327302000 to learn more.
Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. Generally, the interest rates for ARMs are determined by an outside index. Some examples of outside indexes are: the 6-month CD rate, the 1 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. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that ensures your payment can't increase beyond a certain amount over the course of a given year. Plus, almost all ARMs have a "lifetime cap" — the interest rate can never exceed the capped amount.
ARMs usually start out at a very low rate that may increase as the loan ages. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust. Loans like this are usually best for borrowers who anticipate moving in three or five years. These types of adjustable rate loans benefit borrowers who plan to move before the initial lock expires.
Most borrowers who choose ARMs do so because they want to get lower introductory rates and do not plan to remain in the house longer than this introductory low-rate period. ARMs are risky when property values go down and borrowers cannot sell or refinance their loan.
Have questions about mortgage loans? Call us at 8327302000. It's our job to answer these questions and many others, so we're happy to help!