Fixed versus adjustable rate loans
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A fixed-rate loan features a fixed payment for the entire duration of your mortgage. The property tax and homeowners insurance will go up over time, but for the most part, payment amounts on these types of loans don't increase much.
At the beginning of a a fixed-rate mortgage loan, the majority your payment is applied to interest. The amount applied to your principal amount goes up slowly each month.
Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. People choose fixed-rate loans when interest rates are low and they want to lock in this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at a good rate. Call Bob Rutledge at (314) 913-9678 for details.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. Generally, interest rates on ARMs are based on an outside index. A few of these are: the 6-month Certificate of Deposit (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 variances over the course of a year. For example: no more than a couple percent a year, even though the index the rate is based on increases by more than two percent. 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 one period. Most ARMs also cap your rate over the life of the loan.
ARMs usually start out at a very low rate that may increase as the loan ages. You've probably heard of 5/1 or 3/1 ARMs. For these loans, the initial rate is set for three or five years. It then adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust. Loans like this are best for people who anticipate moving in three or five years. These types of ARMs benefit borrowers who will sell their house or refinance before the loan adjusts.
Most borrowers who choose ARMs do so when they want to get lower introductory rates and do not plan on staying in the house longer than this initial low-rate period. ARMs are risky if property values decrease and borrowers are unable to sell their home or refinance their loan.
Have questions about mortgage loans? Call us at (314) 913-9678. We answer questions about different types of loans every day.