Fixed versus adjustable rate loans
A fixed-rate loan features a fixed payment amount for the entire duration of your loan. The property taxes and homeowners insurance will increase over time, but for the most part, payments on these types of loans change little over the life of the loan.
Early in a fixed-rate loan, most of your monthly payment pays interest, and a significantly smaller percentage toward principal. As you pay , more of your payment is applied to principal.
Borrowers might choose a fixed-rate loan to lock in a low rate. Borrowers select these types of loans because interest rates are low and they wish 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 currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at a favorable rate. Call America's Home Loans at 701.222.0100 for details.
Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, the interest for ARMs are based on a federal index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the one-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 are capped, so they can't go up over a specific amount in a given period. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount the payment can increase in a given period. The majority of ARMs also cap your interest rate over the life of the loan period.
ARMs most often have their lowest rates toward the start of the loan. They guarantee that interest rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for a certain number of years (3 or 5), then they adjust after the initial period. These loans are often best for borrowers who anticipate moving in three or five years. These types of ARMs most benefit borrowers who plan to move before the loan adjusts.
You might choose an ARM to get a very low initial interest rate and plan on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs are risky when property values go down and borrowers cannot sell or refinance their loan.
Have questions about mortgage loans? Call us at 701.222.0100. It's our job to answer these questions and many others, so we're happy to help!