Fixed versus adjustable rate loans
A fixed-rate loan features a fixed payment for the entire duration of your mortgage. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally payments for a fixed-rate loan will be very stable.
Your first few years of payments on a fixed-rate loan are applied mostly toward interest. This proportion reverses as the loan ages.
Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. People select fixed-rate loans because interest rates are low and they want to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at a favorable rate. Call Financial Edge Mortgage Corp. at 425-508-9988 to learn more.
Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. Generally, the interest rates for ARMs are determined by a federal 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.
The majority of ARMs feature this cap, which means they can't go up above a certain amount in a given period. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that ensures that your payment can't increase beyond a certain amount in a given year. The majority of ARMs also cap your rate over the duration of the loan.
ARMs most often have the lowest rates toward the beginning. They provide that interest 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 loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are usually best for people who anticipate moving in three or five years. These types of ARMs are best for people who will sell their house or refinance before the loan adjusts.
Most borrowers who choose ARMs do so when they want to get lower introductory rates and do not plan to stay in the house for any longer than the initial low-rate period. ARMs are risky when property values go down and borrowers cannot sell or refinance their loan.
Have questions about mortgage loans? Call us at 425-508-9988. We answer questions about different types of loans every day.
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