Fixed versus adjustable loans
With a fixed-rate loan, your payment stays the same for the life of your mortgage. The amount allocated for principal (the amount you borrowed) increases, however, the amount you pay in interest will go down accordingly. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally payments on your fixed-rate mortgage will be very stable.
During the early amortization period of a fixed-rate loan, most of your monthly payment pays interest, and a significantly smaller percentage goes to principal. This proportion gradually reverses itself as the loan ages.
Borrowers might choose a fixed-rate loan to lock in a low interest rate. Borrowers choose these types of loans when interest rates are low and they wish to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), 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 learn more.
There are many different kinds of Adjustable Rate Mortgages. ARMs are generally adjusted every six months, based on various indexes.
The majority of Adjustable Rate Mortgages are capped, which means they can't increase above a specified amount in a given period of time. Your ARM may feature a cap on interest rate increases 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. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that the payment can increase in one period. Additionally, the great majority of adjustable programs feature a "lifetime cap" — the interest rate can't ever go over the cap amount.
ARMs most often feature the lowest rates at the beginning. They usually provide that 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 fixed for three or five years. After this period it adjusts every year. These types of loans are fixed for a number of years (3 or 5), then they adjust. Loans like this are often best for people who expect to move within three or five years. These types of adjustable rate programs most benefit borrowers who will move before the loan adjusts.
You might choose an ARM to get a lower introductory rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky if property values go down and borrowers can't sell their home or refinance their loan.
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!