Differences between fixed and adjustable rate 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 tax and homeowners insurance will go up over time, but for the most part, payment amounts on these types of loans change little over the life of the loan.
Your first few years of payments on a fixed-rate loan are applied mostly toward interest. This proportion gradually reverses itself as the loan ages.
You might choose a fixed-rate loan in order to lock in a low-interest rate. People select these types of loans when interest rates are low and they want to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at a good rate. Call Financial Capital Funding Group, LLC at 888-540-4114 to discuss your situation with one of our professionals.
There are many different kinds of Adjustable Rate Mortgages. Generally, the interest rates for ARMs are based on an outside index. A few of these are the 6-month Certificate of Deposit (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. Some ARMs can’t adjust more than two percent per year, regardless of the underlying interest rate. Your loan may have a “payment cap” that instead of capping the interest rate directly, caps the amount that the payment can go up in a given period. The majority of ARMs also cap your rate over the life of the loan period.
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. For these loans, the introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for a number of years (3 or 5), then they adjust. Loans like this are best for people who expect to move in three or five years. These types of ARMs benefit people who will move before the loan adjusts.
Most people who choose ARMs do so when they want to get lower introductory rates and do not plan to stay in the home for any longer than the introductory low-rate period. ARMs are risky when property values decrease and borrowers are unable to sell their home or refinance their loan.