Adjustable versus fixed loans
With a fixed-rate loan, your payment stays the same for the life of the mortgage. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally payments on your fixed-rate loan will increase very little.
Your first few years of payments on a fixed-rate loan are applied mostly to pay interest. That gradually reverses as the loan ages.
Borrowers might choose a fixed-rate loan to lock in a low rate. Borrowers select these types of loans because interest rates are low and they want to lock in at this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at a favorable rate. Call Avalon Mortgage Services, Inc. at (708) 403-5181 to learn more.
There are many kinds of Adjustable Rate Mortgages. Generally, interest rates on ARMs are based on an outside index. Some examples of outside indexes are: the 6-month CD rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most programs feature a "cap" that protects borrowers from sudden increases in monthly payments. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than a couple percent per year, even though the underlying index goes up by more than two percent. Sometimes an ARM has a "payment cap" which guarantees that your payment can't go above a certain amount in a given year. In addition, almost all ARM programs feature a "lifetime cap" — this means that your interest rate won't go over the cap amount.
ARMs most often feature their lowest, most attractive rates toward the start. They provide the lower rate from a month to ten years. You may have heard 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 loans are fixed for a number of years (3 or 5), then they adjust after the initial period. Loans like this are often best for people who anticipate moving in three or five years. These types of adjustable rate programs are best for people who will move before the loan adjusts.
Most people who choose ARMs choose them when they want to take advantage of lower introductory rates and do not plan on remaining in the house longer than this introductory low-rate period. ARMs are risky if property values decrease and borrowers cannot sell or refinance.
Have questions about mortgage loans? Call us at (708) 403-5181. It's our job to answer these questions and many others, so we're happy to help!