Adjustable versus fixed loans
A fixed-rate loan features the same payment amount for the entire duration of your loan. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. For the most part payments for a fixed-rate mortgage will be very stable.
When you first take out a fixed-rate mortgage loan, most of the payment goes toward interest. As you pay on the loan, more of your payment is applied to principal.
Borrowers might choose a fixed-rate loan to lock in a low interest rate. Borrowers choose these types of loans because interest rates are low and they wish to lock in this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at the best rate currently available. Call Team USA Mortgage at 218-237-5128 to discuss how we can help.
There are many different kinds of Adjustable Rate Mortgages. Generally, the interest on ARMs are based on a federal index. A few of these 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 have a cap that protects you from sudden monthly payment increases. Some ARMs won't adjust 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 rate directly, caps the amount that the payment can go up in a given period. The majority of ARMs also cap your rate over the duration of the loan.
ARMs most often feature their lowest, most attractive rates toward the start of the loan. They provide the lower interest rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set for three or five years. It then adjusts every year. These types of loans are fixed for 3 or 5 years, 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 people who plan to move before the loan adjusts.
Most people who choose ARMs choose them when they want to take advantage of lower introductory rates and do not plan to remain in the home for any longer than the initial 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 218-237-5128. It's our job to answer these questions and many others, so we're happy to help!