Differences between adjustable and fixed rate loans
A fixed-rate loan features the same payment for the entire duration of your loan. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally monthly payments for a fixed-rate mortgage will be very stable.
At the beginning of a a fixed-rate mortgage loan, the majority the payment is applied to interest. The amount paid toward principal increases up gradually each month.
Borrowers might choose a fixed-rate loan to lock in a low interest rate. Borrowers select fixed-rate loans because interest rates are low and they want to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide greater 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 Mortgage Headquarters of Missouri, Inc at 5733029990 to discuss your situation with one of our professionals.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. Generally, interest rates on ARMs are determined by an outside index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most programs feature a cap that protects you from sudden increases in monthly payments. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that your payment can increase in one period. In addition, the great majority of adjustable programs feature a "lifetime cap" — your rate can't ever exceed the cap amount.
ARMs most often feature the lowest rates at the beginning of the loan. They guarantee the lower rate from a month to ten years. You've probably read about 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for a number of years (3 or 5), then adjust after the initial period. Loans like this are best for borrowers who anticipate moving in three or five years. These types of adjustable rate loans most benefit borrowers who plan to move before the loan adjusts.
You might choose an ARM to get a lower introductory interest rate and plan on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs can be risky when property values go down and borrowers cannot sell their home or refinance.
Have questions about mortgage loans? Call us at 5733029990. It's our job to answer these questions and many others, so we're happy to help!