Adjustable versus fixed loans
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A fixed-rate loan features the same payment over the life of your loan. The property tax and homeowners insurance will increase over time, but generally, payments on fixed rate loans don't increase much.
During the early amortization period of a fixed-rate loan, a large percentage of your payment pays interest, and a significantly smaller percentage goes to principal. The amount applied to your principal amount increases up gradually every month.
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 want to lock in the low rate. For homeowners who have an 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'll be glad to help you lock in a fixed-rate at a good rate. Call Alpine Capital Mortgage at (208) 726-5466 to learn more.
Adjustable Rate Mortgages — ARMs, come in even more varieties. Generally, the interest on ARMs are determined by a federal index. Some examples of outside indexes are: the 6-month CD rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
The majority of ARMs feature this cap, so they can't go up over a specific amount in a given period of time. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than two percent per year, even though the underlying index goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that your payment can go up in one period. In addition, almost all adjustable programs have a "lifetime cap" — this cap means that your rate can't ever exceed the capped amount.
ARMs usually start out at a very low rate that may increase over time. You've likely read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then they adjust. Loans like this are often best for people who anticipate moving within three or five years. These types of adjustable rate loans most benefit borrowers who plan to move before the initial lock expires.
Most borrowers who choose ARMs choose them when they want to take advantage of lower introductory rates and don't plan on remaining in the house longer than the introductory low-rate period. ARMs can be risky when property values go down and borrowers are unable to sell or refinance their loan.
Have questions about mortgage loans? Call us at (208) 726-5466. We answer questions about different types of loans every day.