Adjustable versus fixed rate loans
A fixed-rate loan features the same payment amount over the life of the mortgage. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but generally, payments on fixed rate loans vary little.
Early in a fixed-rate loan, a large percentage of your payment pays interest, and a much smaller part goes to principal. That reverses as the loan ages.
Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose these types of loans when interest rates are low and they wish to lock in at this lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at the best rate currently available. Call America's Home Loans at 701.222.0100 for details.
There are many different types of Adjustable Rate Mortgages. Generally, the interest for ARMs are determined by a federal index. A few of these are: the 6-month CD rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most ARM programs feature a cap that protects you from sudden monthly payment increases. There may be a cap on interest rate variances over the course of a year. For example: no more than two percent a year, even though the index the rate is based on goes up by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that your monthly payment can increase in a given period. The majority of ARMs also cap your interest rate over the duration of the loan.
ARMs most often feature their lowest, most attractive rates at the start. They usually provide that rate from a month to ten years. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set for three or five years. It then adjusts every year. These kinds of loans are fixed for 3 or 5 years, then adjust. Loans like this are best for people who anticipate moving within three or five years. These types of adjustable rate loans most benefit people who plan to sell their house or refinance before the loan adjusts.
Most people who choose ARMs choose them because they want to take advantage of lower introductory rates and don't plan to remain in the home for any longer than the introductory low-rate period. ARMs can be risky in a down market because homeowners could be stuck with increasing rates if they cannot sell or refinance at the lower property value.
Have questions about mortgage loans? Call us at 701.222.0100. It's our job to answer these questions and many others, so we're happy to help!