Adjustable versus fixed rate loans
With a fixed-rate loan, your monthly payment never changes for the life of your loan. The longer you pay, the more of your payment goes toward principal. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part payment amounts for a fixed-rate mortgage will be very stable.
Your first few years of payments on a fixed-rate loan go mostly to pay interest. As you pay on the loan, more of your payment is applied to principal.
You might choose a fixed-rate loan in order to lock in a low interest rate. People choose fixed-rate loans because interest rates are low and they wish to lock in at this 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'd love to assist you in locking a fixed-rate at a good rate. Call Prime Capital Mortgage Corp at 248-644-1200 to discuss your situation with one of our professionals.
There are many different types of Adjustable Rate Mortgages. Generally, interest for ARMs are based on an outside 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.
Most Adjustable Rate Mortgages are capped, which means they won't increase above a specific amount in a given period of time. Some ARMs won't increase more than 2% 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 your payment can increase in one period. Most ARMs also cap your interest rate over the duration of the loan.
ARMs most often feature the lowest rates at the beginning of the loan. They usually provide that rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust after the initial period. Loans like this are usually best for people who expect to move in three or five years. These types of adjustable rate programs benefit borrowers who will move before the initial lock expires.
Most borrowers who choose ARMs do so when they want to get lower introductory rates and don't plan to remain in the home longer than this introductory low-rate period. ARMs can be risky if property values decrease and borrowers can't sell or refinance.
Have questions about mortgage loans? Call us at 248-644-1200. We answer questions about different types of loans every day.
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