Fixed versus adjustable loans
A fixed-rate loan features the same payment over the life of the mortgage. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally payments on your fixed-rate mortgage will be very stable.
When you first take out a fixed-rate mortgage loan, most of the payment goes toward interest. As you pay on the loan, more of your payment is applied to principal.
Borrowers might choose a fixed-rate loan in order to lock in a low rate. People select these types of loans because interest rates are low and they want to lock in this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at a good rate. Call America's Home Loans at 701.222.0100 to learn more.
Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. Generally, interest 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.
The majority of Adjustable Rate Mortgages feature this cap, so they can't go up above a specified amount in a given period of time. There may be a cap on interest rate variances over the course of a year. For example: no more than two percent a year, even though the underlying index increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount your monthly payment can increase in a given period. Plus, almost all ARM programs have a "lifetime cap" — the interest rate won't go over the capped amount.
ARMs usually start out at a very low rate that usually increases over time. You've likely heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are often best for people who expect to move in three or five years. These types of adjustable rate loans benefit people who will move before the initial lock expires.
You might choose an Adjustable Rate Mortgage to get a lower introductory rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs are risky if property values decrease and borrowers are unable to sell their home or refinance their loan.
Have questions about mortgage loans? Call us at 701.222.0100. We answer questions about different types of loans every day.