Differences between adjustable and fixed rate loans
A fixed-rate loan features a fixed payment amount for the entire duration of your loan. The property taxes and homeowners insurance will increase over time, but in general, payments on these types of loans vary little.
Your first few years of payments on a fixed-rate loan go primarily toward interest. This proportion reverses as the loan ages.
Borrowers can choose a fixed-rate loan to lock in a low rate. People choose fixed-rate loans because interest rates are low and they wish to lock in at this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at a good rate. Call VSI Home Lending at (260) 338-2561 to learn more.
Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. Generally, the interest rates for ARMs are based on an outside 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 have a cap that protects you from sudden monthly payment increases. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than two percent per year, even if the index the rate is based on goes up by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount the payment can increase in a given period. Additionally, almost all ARM programs have a "lifetime cap" — this means that the interest rate won't go over the cap amount.
ARMs usually start at a very low rate that may increase over time. You've probably read about 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then adjust. Loans like this are often best for people who anticipate moving in three or five years. These types of adjustable rate programs are best for borrowers who plan to sell their house or refinance before the loan adjusts.
Most people who choose ARMs do so when they want to take advantage of lower introductory rates and do not plan to stay in the house for any longer than the introductory low-rate period. ARMs are risky if property values go down and borrowers can't sell or refinance their loan.
Have questions about mortgage loans? Call us at (260) 338-2561. It's our job to answer these questions and many others, so we're happy to help!