Adjustable versus fixed loans
With a fixed-rate loan, your payment stays the same for the life of the loan. The amount of the payment allocated for your principal (the loan amount) increases, however, your interest payment will go down accordingly. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part monthly payments for your fixed-rate loan will be very stable.
During the early amortization period of a fixed-rate loan, a large percentage of your monthly payment pays interest, and a much smaller part toward principal. As you pay on the loan, more of your payment is applied to principal.
You can choose a fixed-rate loan in order to lock in a low rate. People choose fixed-rate loans when interest rates are low and they want to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at a good rate. Call Hawk Mortgage Group at (443) 619-7900 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 Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most programs feature a "cap" that protects you from sudden monthly payment increases. There may be a cap on how much your interest rate can go up in one period. For example: no more than a couple percent a year, even though the index the rate is based on goes up by more than two percent. Sometimes an ARM has a "payment cap" which guarantees your payment can't go above a certain amount in a given year. Almost all ARMs also cap your rate over the duration of the loan.
ARMs most often have the lowest rates toward the beginning of the loan. They provide that interest rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then they adjust. These loans are best for people who expect to move in three or five years. These types of ARMs most benefit people who will sell their house or refinance before the initial lock expires.
You might choose an Adjustable Rate Mortgage to get a lower initial interest rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky in a down market because homeowners can get stuck with increasing rates when they cannot sell or refinance with a lower property value.
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!