Differences between fixed and adjustable loans
A fixed-rate loan features the same payment for the entire duration of your mortgage. The property taxes and homeowners insurance will increase over time, but in general, payments on fixed rate loans don't increase much.
Your first few years of payments on a fixed-rate loan are applied primarily to pay interest. As you pay on the loan, more of your payment goes toward principal.
You might choose a fixed-rate loan in order to lock in a low rate. Borrowers select fixed-rate loans because interest rates are low and they wish to lock in this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide 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 the best rate currently available. Call America's Home Loans at 701.222.0100 to discuss your situation with one of our professionals.
There are many types of Adjustable Rate Mortgages. Generally, interest on ARMs are based on an outside index. A few of these are: the 6-month CD rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most ARMs feature this cap, which means they can't go up above a certain amount in a given period. Some ARMs can't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which ensures that your payment can't go above a certain amount in a given year. The majority of ARMs also cap your interest rate over the life of the loan.
ARMs most often feature their lowest rates toward the beginning of the loan. They usually guarantee that rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust. These loans are often best for people who anticipate moving within three or five years. These types of adjustable rate programs benefit borrowers who will move before the loan adjusts.
Most borrowers who choose ARMs choose them because they want to get lower introductory rates and don't plan to stay in the home for any longer than this introductory low-rate period. ARMs can be risky in a down market because homeowners can get stuck with rates that go up when they can't sell their home or refinance at the lower property value.
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!