Fixed versus adjustable loans

A fixed-rate loan features the same payment for the entire duration of the mortgage. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. For the most part payment amounts on your fixed-rate mortgage will be very stable.

At the beginning of a a fixed-rate loan, most of your payment goes toward interest. This proportion gradually reverses itself as the loan ages.

Borrowers can 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 low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to 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.

There are many types of Adjustable Rate Mortgages. Generally, the interest for ARMs are based on an outside index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the one-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 increases in monthly payments. There may be a cap on how much your interest rate can increase in one period. For example: no more than two percent a year, even if the index the rate is based on increases by more than two percent. Sometimes an ARM has a "payment cap" which ensures your payment won't go above a certain amount in a given year. In addition, almost all ARMs have a "lifetime cap" — the rate can't go over the capped percentage.

ARMs usually start out at a very low rate that may increase over time. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the initial rate is set for three or five years. After this period it adjusts every year. These loans are fixed for a certain number of years (3 or 5), then they adjust after the initial period. These loans are best for borrowers who anticipate moving within three or five years. These types of adjustable rate loans are best for people who will move before the initial lock expires.

You might choose an Adjustable Rate Mortgage to get a lower initial rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up if they can't sell their home 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!

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