Differences between fixed and adjustable loans
A fixed-rate loan features a fixed payment amount for the entire duration of your mortgage. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally payment amounts for a fixed-rate mortgage will be very stable.
Early in a fixed-rate loan, a large percentage of your monthly payment goes toward interest, and a significantly smaller part toward principal. The amount paid toward your principal amount goes up slowly every month.
Borrowers might choose a fixed-rate loan in order to lock in a low rate. Borrowers choose these types of loans because interest rates are low and they want to lock in the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at a favorable rate. Call Hawk Mortgage Group at (443) 619-7900 to learn more.
There are many different types of Adjustable Rate Mortgages. Generally, the interest on ARMs are determined by an outside index. Some examples of outside indexes 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 have a "cap" that protects you from sudden monthly payment increases. Some ARMs won't increase 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 your monthly payment can go up in a given period. The majority of ARMs also cap your interest rate over the duration of the loan.
ARMs usually start at a very low rate that may increase as the loan ages. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set for three or five years. It then adjusts every year. These kinds of loans are fixed for a number of years (3 or 5), then adjust. Loans like this are often best for borrowers who anticipate moving within three or five years. These types of adjustable rate loans are best for borrowers who will sell their house or refinance before the loan adjusts.
You might choose an Adjustable Rate Mortgage to get a lower introductory rate and count on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs can be risky if property values go down and borrowers are unable to sell their home or refinance.
Have questions about mortgage loans? Call us at (443) 619-7900. It's our job to answer these questions and many others, so we're happy to help!