Fixed versus adjustable loans
A fixed-rate loan features a fixed payment for the entire duration of your loan. The property tax and homeowners insurance will increase over time, but generally, payments on these types of loans change little over the life of the loan.
Your first few years of payments on a fixed-rate loan are applied mostly to pay interest. The amount applied to your principal amount goes up slowly every month.
If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate. Call Integrity Mortgage and Financial Services Inc at 219-548-2255 to discuss your situation with one of our professionals.
Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. Generally, the interest on ARMs are based on an outside index. Some examples of outside indexes are: the 6-month 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 ARMs are capped, which means they won't increase over a specified amount in a given period. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which guarantees your payment won't increase beyond a certain amount in a given year. Almost all ARMs also cap your interest rate over the duration of the loan period.
ARMs most often feature the lowest, most attractive rates toward the start of the loan. They guarantee the lower interest rate for an initial period that varies greatly. You've likely heard of 5/1 or 3/1 ARMs. For 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 adjust after the initial period. Loans like this are often best for people who anticipate moving in three or five years. These types of adjustable rate programs are best for borrowers who plan to move before the loan adjusts.
Most people who choose ARMs do so when they want to take advantage of lower introductory rates and do not plan to remain in the house for any longer than this introductory low-rate period. ARMs can be risky when property values decrease and borrowers are unable to sell or refinance.
Have questions about mortgage loans? Call us at 219-548-2255. It's our job to answer these questions and many others, so we're happy to help!