Differences between fixed and adjustable loans
With a fixed-rate loan, your payment remains the same for the life of the loan. The portion allocated for your principal (the actual loan amount) goes up, however, the amount you pay in interest will go down accordingly. The property tax and homeowners insurance will increase over time, but generally, payment amounts on fixed rate loans change little over the life of the loan.
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 on the loan, more of your payment is applied to principal.
You can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select these types of loans because interest rates are low and they wish to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at a good rate. Call Prime Capital Mortgage Corp at 248-644-1200 for details.
Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. Generally, the interest rates on ARMs are determined by an outside index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
The majority of ARMs feature this cap, so they won't go up above a certain amount in a given period. There may be a cap on how much your interest rate can go up in one period. For example: no more than a couple percent per year, even though the index the rate is based on goes up by more than two percent. Sometimes an ARM has a "payment cap" that guarantees your payment can't increase beyond a fixed amount in a given year. Plus, the great majority of ARMs have a "lifetime cap" — your interest rate can't ever exceed the cap percentage.
ARMs usually start out at a very low rate that usually increases over time. You've probably read about 5/1 or 3/1 ARMs. For these loans, the introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for a certain number of years (3 or 5), then adjust after the initial period. Loans like this are often best for people who anticipate moving in three or five years. These types of ARMs are best for borrowers who will move before the loan adjusts.
Most borrowers who choose ARMs choose them when they want to take advantage of lower introductory rates and do not plan on staying in the home for any longer than the introductory low-rate period. ARMs can be risky in a down market because homeowners can get stuck with increasing rates when they can't sell or refinance with a 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!