Differences between adjustable and fixed rate loans
A fixed-rate loan features a fixed payment over the life of your mortgage. The property tax and homeowners insurance will increase over time, but generally, payment amounts on fixed rate loans change little over the life of the loan.
Your first few years of payments on a fixed-rate loan go mostly toward interest. That reverses as the loan ages.
Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. People select these types of 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 into a fixed-rate loan can offer greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at a good rate. Call Budica Financial Corporation - NMLS #911613 at 9518404188 to learn more.
Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. Generally, the interest rates on ARMs are based on an outside index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the one-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 are capped, which means they can't go up over a specified amount in a given period. Some ARMs can't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that ensures your payment will not go above a fixed amount in a given year. In addition, almost all ARMs feature a "lifetime cap" — this means that your interest rate won't exceed the capped percentage.
ARMs usually start at a very low rate that may increase as the loan ages. You've probably read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. It then adjusts every year. These kinds of loans are fixed for a certain number of years (3 or 5), then they adjust after the initial period. These loans are best for people who expect to move in 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 people who choose ARMs do so when they want to take advantage of lower introductory rates and do not plan to remain in the house for any longer than the introductory low-rate period. ARMs can be risky in a down market because homeowners can get stuck with rates that go up if they can't sell or refinance at the lower property value.