Differences between fixed and adjustable loans
A fixed-rate loan features a fixed payment amount for the entire duration of your mortgage. The property tax and homeowners insurance will go up over time, but generally, payment amounts on fixed rate loans change little over the life of the loan.
Early in a fixed-rate loan, most of your monthly payment goes toward interest, and a much smaller percentage goes to principal. This proportion reverses itself as the loan ages.
You can choose a fixed-rate loan in order to lock in a low interest 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'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call Northeast Bancorp of America, Inc. at (440) 234-9660 to discuss how we can help.
There are many different kinds of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.
Most programs feature a "cap" that protects you from sudden increases in monthly payments. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than two percent a year, even though the underlying index increases by more than two percent. Sometimes an ARM features a "payment cap" that guarantees your payment can't go above a fixed amount in a given year. Most ARMs also cap your rate over the life of the loan period.
ARMs most often have their lowest rates at the beginning. They usually guarantee the lower interest 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 loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are best for people who anticipate moving within three or five years. These types of adjustable rate loans most benefit borrowers who plan to sell their house or refinance before the initial lock expires.
You might choose an ARM to take advantage of a very low initial interest rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates when they can't sell their home or refinance at the 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!