Adjustable versus fixed loans
With a fixed-rate loan, your monthly payment doesn't change for the entire duration 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 your insurance rates might vary as well. For the most part monthly payments on your fixed-rate mortgage will increase very little.
During the early amortization period of a fixed-rate loan, a large percentage of your payment pays interest, and a significantly smaller percentage goes to principal. As you pay , more of your payment is applied to principal.
Borrowers can choose a fixed-rate loan to lock in a low interest rate. People select fixed-rate loans when 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 more 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.
Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, interest on ARMs are determined by a federal 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 ARM programs have a "cap" that protects borrowers from sudden increases in monthly payments. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that ensures your payment won't go above a fixed amount in a given year. Additionally, the great majority of ARM programs feature a "lifetime cap" — this cap means that your rate can't ever go over the capped amount.
ARMs most often feature the lowest, most attractive rates toward the beginning of the loan. They usually guarantee the lower rate for an initial period that varies greatly. You may hear people talking 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 types of 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 anticipate moving in three or five years. These types of adjustable rate loans are best for borrowers who plan to move before the loan adjusts.
Most borrowers who choose ARMs do so because they want to get lower introductory rates and do not plan on staying in the home for any longer than the initial low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up if they can't sell their home or refinance at the lower property value.
Have questions about mortgage loans? Call us at 248-644-1200. It's our job to answer these questions and many others, so we're happy to help!