With a fixed-rate loan, your monthly payment never changes for the life of your mortgage. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and so might the homeowner’s insurance in your monthly payment. For the most part payments for a fixed-rate loan will increase very little.
During the early amortization period of a fixed-rate loan, most of your monthly payment goes toward interest, and a much smaller part toward principal. The amount applied to principal increases up slowly each month.
Borrowers might choose a fixed-rate loan to lock in a low rate. Borrowers choose these types of loans when interest rates are low and they want to lock in at the lower rate. If you have an Adjustable Rate Mortgage (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 help you lock in a fixed-rate at the best rate currently available. Call American Loan & Refinance at (732) 664-9624 for details.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. Generally, interest rates on ARMs are determined by a federal index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the one-year rate on Treasure Securities, 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. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than a couple percent per year, even if the index the rate is based on increases by more than two percent. Sometimes an ARM has a “payment cap” which guarantees your payment won’t go above a fixed amount over the course of a given year. The majority of ARMs also cap your interest rate over the duration of the loan period.
ARMs most often have their lowest, most attractive rates at the beginning. They guarantee that interest rate for an initial period that varies greatly. You may have heard 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 usually best for borrowers who expect to move within three or five years. These types of adjustable rate programs benefit borrowers who plan to sell their house or refinance before the loan adjusts.
You might choose an ARM to get a lower initial interest rate and count on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky when property values go down and borrowers cannot sell or refinance.