Adjustable versus fixed rate loans
With a fixed-rate loan, your monthly payment stays the same for the life of your mortgage. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance will go up over time, but for the most part, payment amounts on these types of loans vary little.
Your first few years of payments on a fixed-rate loan go mostly toward interest. The amount paid toward your principal amount goes up slowly every month.
Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select fixed-rate loans when interest rates are low and they wish to lock in the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call The Lending Source at (973) 601-2122 to discuss your situation with one of our professionals.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. Generally, the interest on ARMs are determined by an outside index. A few of these 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 ARMs feature this cap, which means they won't increase above a specified amount in a given period of time. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than two percent per year, even though the underlying index goes up by more than two percent. Sometimes an ARM features a "payment cap" which guarantees your payment can't increase beyond a fixed amount in a given year. Additionally, the great majority of ARMs have a "lifetime cap" — your rate can't ever exceed the cap amount.
ARMs usually start at a very low rate that usually increases over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust. These loans are usually best for people who anticipate moving in three or five years. These types of adjustable rate programs benefit people who will sell their house or refinance before the initial lock expires.
You might choose an ARM to get a lower introductory rate and count on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs can be risky in a down market because homeowners can get stuck with rates that go up when they can't sell or refinance at the lower property value.
Have questions about mortgage loans? Call us at (973) 601-2122. It's our job to answer these questions and many others, so we're happy to help!