Differences between fixed and adjustable rate loans
With a fixed-rate loan, your monthly payment doesn't change for the entire duration of the loan. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance will go up over time, but generally, payments on these types of loans don't increase much.
Your first few years of payments on a fixed-rate loan go mostly toward interest. The amount paid toward your principal amount goes up slowly each month.
You might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select these types of loans when interest rates are low and they wish to lock in at the low 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 help you lock in a fixed-rate at the best rate currently available. Call Independent Bankers Mortgage at (888) 478-9991 for details.
There are many kinds of Adjustable Rate Mortgages. Generally, interest rates 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 Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most ARM programs have a cap that protects borrowers from sudden monthly payment increases. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than two percent a year, even if the index the rate is based on goes up by more than two percent. Sometimes an ARM has a "payment cap" that ensures that your payment will not go above a fixed amount over the course of a given year. The majority of ARMs also cap your rate over the life of the loan.
ARMs usually start out at a very low rate that usually increases as the loan ages. You've probably read about 5/1 or 3/1 ARMs. For these loans, the initial rate is set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust. Loans like this are usually best for people who anticipate moving in three or five years. These types of ARMs most benefit people who plan to move before the initial lock expires.
Most people who choose ARMs do so because they want to get lower introductory rates and do not plan to stay in the home for any longer than this introductory low-rate period. ARMs are risky if property values decrease and borrowers are unable to sell or refinance.