Differences between adjustable and fixed loans
A fixed-rate loan features the same payment over the life of your mortgage. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but in general, payment amounts on fixed rate loans don't increase much.
When you first take out a fixed-rate mortgage loan, the majority the payment goes toward interest. As you pay , more of your payment goes toward principal.
Borrowers might choose a fixed-rate loan to lock in a low rate. People select fixed-rate loans because interest rates are low and they wish to lock in this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at a favorable rate. Call VSI Home Lending at (260) 338-2561 to discuss your situation with one of our professionals.
There are many different types of Adjustable Rate Mortgages. Generally, the interest rates for ARMs are based on an outside index. A few of these are: the 6-month CD rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most programs have 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 underlying index goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount your monthly payment can increase in a given period. Almost all ARMs also cap your interest rate over the duration of the loan.
ARMs most often have their lowest rates at the beginning. They provide that interest rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set for three or five years. After this period it adjusts every year. These types of loans are fixed for a certain number of years (3 or 5), then adjust. These loans are best for borrowers who anticipate moving within three or five years. These types of adjustable rate programs are best for people who plan to move before the loan adjusts.
Most borrowers who choose ARMs do so when they want to get lower introductory rates and do not plan on remaining in the house longer than this introductory low-rate period. ARMs can be risky when property values decrease and borrowers are unable to sell their home 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!