Adjustable versus fixed rate 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, payment amounts on fixed rate loans vary little.
Your first few years of payments on a fixed-rate loan go mostly to pay interest. The amount paid toward principal increases up slowly each month.
Borrowers might choose a fixed-rate loan to lock in a low interest rate. Borrowers select these types of loans when interest rates are low and they wish to lock in this low rate. For homeowners who have an 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 can help you lock in a fixed-rate at the best rate currently available. Call Northeast Bancorp of America, Inc. at (440) 234-9660 to learn more.
Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs are normally adjusted every six months, based on various indexes.
Most Adjustable Rate Mortgages feature this cap, so they can't go up above a specified amount in a given period of time. There may be a cap on interest rate increases over the course of a year. For example: no more than two percent per year, even though the underlying index goes up by more than two percent. Sometimes an ARM has a "payment cap" that guarantees that your payment won't increase beyond a fixed amount in a given year. Most ARMs also cap your rate over the life of the loan.
ARMs usually start out at a very low rate that usually increases over time. You've likely heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These loans are fixed for a number of years (3 or 5), then they adjust. These loans are best for people who anticipate moving within three or five years. These types of adjustable rate loans are best for borrowers who plan to move before the initial lock expires.
You might choose an ARM to take advantage of a lower introductory interest rate and count on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up if they can't sell or refinance with a lower property value.
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!