Fixed versus adjustable rate loans
A fixed-rate loan features a fixed payment amount over the life of your mortgage. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally payment amounts on a fixed-rate mortgage will be very stable.
When you first take out a fixed-rate mortgage loan, the majority the payment goes toward interest. As you pay , more of your payment is applied to principal.
You can choose a fixed-rate loan to lock in a low interest rate. People choose these types of loans when interest rates are low and they want to lock in at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at a favorable rate. Call Northeast Bancorp of America, Inc. at (440) 234-9660 to learn more.
There are many types of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.
Most ARMs are capped, so they can't go up over a specified amount in a given period of time. Some ARMs can't increase more than 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount that the payment can go up in one period. Plus, the great majority of ARMs have a "lifetime cap" — this means that your rate can't exceed the cap percentage.
ARMs most often have the lowest rates toward the beginning. They usually provide the lower interest rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These types of loans are fixed for a certain number of years (3 or 5), then adjust. These loans are best for people who anticipate moving in three or five years. These types of adjustable rate loans benefit borrowers who plan to move before the loan adjusts.
Most people who choose ARMs choose them because they want to get lower introductory rates and don't plan on remaining in the house longer than the introductory low-rate period. ARMs can be risky if property values go down and borrowers are unable to sell or refinance their loan.
Have questions about mortgage loans? Call us at (440) 234-9660. It's our job to answer these questions and many others, so we're happy to help!