Differences between adjustable and fixed rate loans

A fixed-rate loan features a fixed payment amount over the life of the mortgage. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part payments for a fixed-rate loan will be very stable.

When you first take out a fixed-rate loan, the majority the payment goes toward interest. As you pay , more of your payment is applied to principal.

Borrowers can choose a fixed-rate loan to lock in a low rate. People choose these types of loans when interest rates are low and they want to lock in at this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more monthly payment stability. 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 4402349660 for details.

There are many kinds of Adjustable Rate Mortgages. Generally, interest for ARMs are determined by a federal index. Some examples of outside indexes are: the 6-month 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 you from sudden monthly payment increases. There may be a cap on interest rate increases over the course of a year. For example: no more than a couple percent per year, even if the underlying index increases by more than two percent. Sometimes an ARM features a "payment cap" which ensures that your payment won't go above a fixed amount in a given year. Plus, the great majority of adjustable programs have a "lifetime cap" — this cap means that your interest rate can't go over the cap percentage.

ARMs usually start out at a very low rate that usually increases over time. You may have heard 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 types of loans are fixed for a certain number of years (3 or 5), then they adjust. These loans are best for borrowers who expect to move in three or five years. These types of ARMs are best for borrowers who will move before the loan adjusts.

Most people who choose ARMs do so when they want to take advantage of lower introductory rates and don't plan on remaining in the home for any longer than the introductory low-rate period. ARMs can be risky in a down market because homeowners could be stuck with increasing rates if they can't sell or refinance at the lower property value.

Have questions about mortgage loans? Call us at 4402349660. It's our job to answer these questions and many others, so we're happy to help!