Differences between adjustable and fixed loans
With a fixed-rate loan, your payment stays the same for the entire duration of the loan. The amount of the payment allocated to your principal (the loan amount) will go up, but the amount you pay in interest will decrease in the same amount. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part payment amounts for your fixed-rate mortgage will increase very little.
At the beginning of a a fixed-rate mortgage loan, most of the payment goes toward interest. This proportion gradually reverses itself as the loan ages.
Borrowers can choose a fixed-rate loan to lock in a low interest rate. People choose fixed-rate loans when interest rates are low and they wish to lock in this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at the best rate currently available. Call Saab Mortgage at 703-288-0777 to discuss your situation with one of our professionals.
Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. Generally, the interest on ARMs are based on a federal index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most Adjustable Rate Mortgages are capped, so they won't increase above a certain amount in a given period. There may be a cap on interest rate variances over the course of a year. For example: no more than a couple percent per year, even though the underlying index increases by more than two percent. Sometimes an ARM features a "payment cap" that ensures that your payment won't go above a fixed amount over the course of a given year. Almost all ARMs also cap your rate over the life of the loan.
ARMs usually start at a very low rate that may increase over time. You've likely read about 5/1 or 3/1 ARMs. For these loans, the initial rate is set for three or five years. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then they adjust after the initial period. Loans like this are usually best for people who anticipate moving in three or five years. These types of adjustable rate programs are best for borrowers who plan to sell their house or refinance before the initial lock expires.
You might choose an Adjustable Rate Mortgage to take advantage of a very low initial interest rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs can be risky in a down market because homeowners could be stuck with rates that go up if they can't sell their home or refinance at the lower property value.
Have questions about mortgage loans? Call us at 703-288-0777. It's our job to answer these questions and many others, so we're happy to help!