Adjustable versus fixed rate loans
With a fixed-rate loan, your payment remains the same for the entire duration of the mortgage. The portion allocated for principal (the amount you borrowed) goes up, however, the amount you pay in interest will go down in the same amount. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally payment amounts for your fixed-rate loan will increase very little.
Your first few years of payments on a fixed-rate loan go primarily to pay interest. As you pay on the loan, more of your payment is applied to principal.
You might choose a fixed-rate loan in order to lock in a low rate. People select these types of loans because interest rates are low and they wish to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater consistency 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.
Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. Generally, the interest rates for ARMs are determined by a federal index. Some examples of outside indexes 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.
The majority of ARMs are capped, so they can't go up over a specific amount in a given period of time. 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 underlying index goes up by more than two percent. Sometimes an ARM features a "payment cap" that ensures your payment won't increase beyond a certain amount over the course of a given year. Plus, almost all ARM programs have a "lifetime cap" — the interest rate can't exceed the capped amount.
ARMs most often feature the lowest, most attractive rates at the start of the loan. They usually guarantee that interest rate from a month to ten years. You've probably heard of 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust. These loans are best for borrowers who expect to move in three or five years. These types of adjustable rate programs are best for borrowers who will move before the loan adjusts.
Most borrowers who choose ARMs do so because they want to take advantage of lower introductory rates and don't plan on staying in the house for any longer than this introductory low-rate period. ARMs can be risky when property values decrease and borrowers cannot 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!