Differences between adjustable and fixed loans
A fixed-rate loan features a fixed payment over the life of the mortgage. The property tax and homeowners insurance will go up over time, but generally, payments on these types of loans don't increase much.
During the early amortization period of a fixed-rate loan, a large percentage of your monthly payment goes toward interest, and a much smaller part goes to principal. The amount applied to principal increases up slowly every month.
You might choose a fixed-rate loan to lock in a low rate. People select these types of loans because interest rates are low and they wish to lock in the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at the best rate currently available. Call Northeast Bancorp of America, Inc. at (440) 234-9660 for details.
Adjustable Rate Mortgages — ARMs, come in many varieties. ARMs are normally adjusted every six months, based on various indexes.
Most programs feature a cap that protects borrowers from sudden increases in monthly payments. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than two percent a year, even if the underlying index increases by more than two percent. Sometimes an ARM features a "payment cap" that ensures your payment won't increase beyond a fixed amount in a given year. Additionally, the great majority of ARM programs feature a "lifetime cap" — this means that your interest rate can't ever exceed the capped percentage.
ARMs most often feature their lowest, most attractive rates at the start of the loan. They guarantee the lower rate for an initial period that varies greatly. You may have heard 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 kinds of loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are usually best for borrowers who expect to move within three or five years. These types of ARMs most benefit people who plan to sell their house or refinance before the initial lock expires.
You might choose an Adjustable Rate Mortgage to take advantage of a very low initial rate and count on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs can be risky if property values go down and borrowers cannot sell their home or refinance.
Have questions about mortgage loans? Call us at (440) 234-9660. We answer questions about different types of loans every day.