A fixed-rate loan features a fixed payment over the life of the loan. The property taxes and homeowners insurance will increase over time, but for the most part, payments on these types of loans vary little.
Your first few years of payments on a fixed-rate loan are applied primarily toward interest. The amount paid toward principal goes up gradually every month.
You can choose a fixed-rate loan to lock in a low interest rate. People select these types of loans because interest rates are low and they want to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more stability 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 Primary Residential Mortgage, Inc. at (209) 951-5100 for details.
There are many different types of Adjustable Rate Mortgages. Generally, the interest on ARMs are determined by an outside index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most ARM programs have a cap that protects borrowers from sudden increases in monthly payments. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which ensures your payment won't go above a fixed amount in a given year. In addition, almost all ARM programs feature a "lifetime cap" — this means that your interest rate can't 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. In these loans, the introductory 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 after the initial period. These loans are usually best for people who expect to move within three or five years. These types of adjustable rate programs most benefit borrowers who will sell their house or refinance before the loan adjusts.
You might choose an ARM to get 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 if property values decrease and borrowers can't sell their home or refinance their loan.
Have questions about mortgage loans? Call me at (209) 470-7161 or complete the section below and I will reach out to you promptly.
