Adjustable versus fixed loans
A fixed-rate loan features a fixed payment amount for the entire duration of your mortgage. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part payments for a fixed-rate loan will increase very little.
Your first few years of payments on a fixed-rate loan are applied primarily to pay interest. This proportion gradually reverses as the loan ages.
Borrowers might choose a fixed-rate loan to lock in a low rate. People choose fixed-rate loans because interest rates are low and they want to lock in at this lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at a good rate. Call Washingtonian Mortgage, LLC at 410-451-2755 to learn more.
Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. Generally, interest for ARMs are determined by an outside index. Some examples of outside indexes are: the 6-month Certificate of Deposit (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 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. Almost all 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 heard of 5/1 or 3/1 ARMs. In these loans, the initial rate is set 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. These loans are often best for borrowers who anticipate moving within three or five years. These types of ARMs are best for borrowers who will move before the initial lock expires.
You might choose an Adjustable Rate Mortgage to get a very low introductory rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs are risky when property values go down and borrowers are unable to sell their home or refinance their loan.
Have questions about mortgage loans? Call us at 410-451-2755. We answer questions about different types of loans every day.