Adjustable versus fixed loans
A fixed-rate loan features the same payment amount for the entire duration of the loan. 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 vary little.
During the early amortization period of a fixed-rate loan, most of your payment goes toward interest, and a significantly smaller part toward principal. The amount paid toward principal increases up slowly every month.
Borrowers can choose a fixed-rate loan in order to lock in a low rate. People select fixed-rate loans when interest rates are low and they want to lock in the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at the best rate currently available. Call Contemporary Mortgage Services, Inc at 407-834-3377 to discuss how we can help.
There are many kinds of Adjustable Rate Mortgages. Generally, the interest rates on ARMs are based on an outside index. A few of these 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 have a "cap" that protects borrowers from sudden monthly payment increases. There may be a cap on interest rate increases over the course of a year. For example: no more than a couple percent a year, even if the underlying index goes up by more than two percent. Sometimes an ARM features a "payment cap" which ensures that your payment can't go above a fixed amount in a given year. The majority of ARMs also cap your interest rate over the life of the loan period.
ARMs usually start at a very low rate that may increase as the loan ages. You've probably 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 adjust after the initial period. Loans like this are often best for borrowers who expect to move in three or five years. These types of adjustable rate loans benefit people who will sell their house or refinance before the loan adjusts.
You might choose an ARM to take advantage of a lower introductory interest rate and count on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up when they cannot sell or refinance at the lower property value.
Have questions about mortgage loans? Call us at 407-834-3377. It's our job to answer these questions and many others, so we're happy to help!
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