Differences between fixed and adjustable rate loans
With a fixed-rate loan, your monthly payment remains the same for the life of the loan. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance will go up over time, but generally, payments on fixed rate loans change little over the life of the loan.
Your first few years of payments on a fixed-rate loan are applied primarily toward interest. As you pay , more of your payment is applied to principal.
You can choose a fixed-rate loan to lock in a low rate. People choose these types of loans because interest rates are low and they wish to lock in at the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at the best rate currently available. Call Prime Capital Mortgage Corp at 248-644-1200 for details.
There are many different kinds of Adjustable Rate Mortgages. Generally, the interest for ARMs are determined by a federal 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.
The majority of ARMs are capped, so they can't go up above a certain amount in a given period. There may be a cap on interest rate variances over the course of a year. For example: no more than a couple percent per year, even if the underlying index goes up by more than two percent. Sometimes an ARM has a "payment cap" which ensures that your payment can't increase beyond a fixed amount in a given year. Most ARMs also cap your interest rate over the duration of the loan.
ARMs most often feature their lowest rates toward the start of the loan. They guarantee that rate for an initial period that varies greatly. You've likely 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 loans are fixed for a number of years (3 or 5), then adjust after the initial period. Loans like this are often best for borrowers who expect to move in three or five years. These types of ARMs are best for people who plan to move before the loan adjusts.
Most people who choose ARMs choose them when they want to get lower introductory rates and don't plan on staying in the house for any longer than this initial low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up when they can't sell or refinance with a lower property value.
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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