Fixed versus adjustable loans
With a fixed-rate loan, your payment doesn't change for the entire duration of your mortgage. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. For the most part payment amounts for a fixed-rate loan will be very stable.
During the early amortization period of a fixed-rate loan, most of your payment goes toward interest, and a significantly smaller part goes to principal. The amount applied to your principal amount increases up gradually each month.
You might choose a fixed-rate loan in order to lock in a low rate. People select these types of loans when interest rates are low and they wish to lock in at this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at a favorable rate. Call Omni Mortgage Company, Inc. at 603-893-6616 to learn more.
Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. Generally, interest rates on ARMs are based on a federal index. A few of these 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 Adjustable Rate Mortgages feature this cap, which means they can't increase above a specific amount in a given period of time. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that your payment can increase in one period. Almost all ARMs also cap your rate over the duration of the loan.
ARMs most often have their lowest rates toward the start of the loan. They usually guarantee the lower rate from a month to ten years. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed 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. Loans like this are best for borrowers who anticipate moving within three or five years. These types of ARMs are best for people who will sell their house or refinance before the initial lock expires.
Most borrowers who choose ARMs choose them because they want to get lower introductory rates and don't plan on staying in the home longer than the introductory low-rate period. ARMs can be risky if property values go down and borrowers cannot sell or refinance.
Have questions about mortgage loans? Call us at 603-893-6616. We answer questions about different types of loans every day.