Differences between adjustable and fixed loans
With a fixed-rate loan, your payment doesn't change for the life of your mortgage. The amount that goes for your principal (the loan amount) goes up, but your interest payment will go down in the same amount. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but in general, payment amounts on these types of loans vary little.
At the beginning of a a fixed-rate mortgage loan, the majority the payment is applied to interest. The amount paid toward your principal amount increases up slowly each month.
Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose these types of loans when interest rates are low and they want to lock in the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater consistency 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 the best rate currently available. Call Forum Mortgage Bancorp at (773) 774-9040 Ext 121 to learn more.
Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, interest on 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.
The majority of ARMs feature this cap, so they won't go up above a certain amount in a given period of time. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount the monthly payment can go up in a given period. Additionally, the great majority of ARMs feature a "lifetime cap" — the rate can't exceed the capped percentage.
ARMs usually start out at a very low rate that may increase over time. 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. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust. These loans are best for borrowers who anticipate moving in three or five years. These types of ARMs are best for borrowers who will sell their house or refinance before the initial lock expires.
Most borrowers who choose ARMs choose them when they want to take advantage of lower introductory rates and do not plan on remaining in the house longer than the introductory low-rate period. ARMs are risky when property values decrease and borrowers cannot sell their home or refinance.
Have questions about mortgage loans? Call us at (773) 774-9040 Ext 121. It's our job to answer these questions and many others, so we're happy to help!