Differences between fixed and adjustable loans
A fixed-rate loan features a fixed payment amount for the entire duration of your loan. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part payment amounts for a fixed-rate mortgage will increase very little.
Early in a fixed-rate loan, a large percentage of your monthly payment pays interest, and a much smaller part goes to principal. The amount paid toward your principal amount increases up gradually each month.
You can choose a fixed-rate loan to lock in a low interest rate. Borrowers select these types of loans because 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 greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love 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 different types of Adjustable Rate Mortgages. Generally, the interest on ARMs are based on an outside index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most ARM programs feature a cap that protects borrowers from sudden monthly payment increases. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which ensures your payment will not increase beyond a certain amount over the course of a given year. Additionally, almost all ARM programs have a "lifetime cap" — this cap means that the rate can never go over the cap percentage.
ARMs usually start out at a very low rate that usually increases as the loan ages. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is fixed 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. Loans like this are often 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 loan adjusts.
You might choose an ARM to take advantage of a lower initial interest rate and count on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky in a down market because homeowners could be stuck with rates that go up when they can't sell or refinance with a lower property value.
Have questions about mortgage loans? Call us at (440) 234-9660. We answer questions about different types of loans every day.