Differences between adjustable and fixed rate loans
With a fixed-rate loan, your monthly payment never changes for the life of the mortgage. The portion that goes for principal (the actual loan amount) will go up, however, your interest payment will decrease accordingly. 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 these types of loans don't increase much.
At the beginning of a a fixed-rate mortgage loan, most of the payment is applied to interest. The amount applied to your principal amount increases up slowly every month.
You might 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 this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at a good rate. Call Forum Mortgage Bancorp at (773) 774-9040 Ext 121 for details.
There are many types of Adjustable Rate Mortgages. Generally, interest on ARMs are based on an outside index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the 1 year rate on Treasure Securities, 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. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that your monthly payment can go up in a given period. Almost all ARMs also cap your rate over the duration of the loan period.
ARMs most often have their lowest, most attractive rates toward the start. They usually provide that interest rate from a month to ten years. You've probably read about 5/1 or 3/1 ARMs. For these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then adjust. Loans like this are best for borrowers who anticipate moving in three or five years. These types of adjustable rate loans most benefit borrowers who plan to move before the initial lock expires.
Most people who choose ARMs choose them when they want to get lower introductory rates and don't plan on staying in the home longer than this introductory low-rate period. ARMs can be risky in a down market because homeowners can get stuck with rates that go up when they can't sell or refinance at the lower property value.
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!