Differences between fixed and adjustable rate loans
With a fixed-rate loan, your payment never changes for the life of the mortgage. The portion of the payment allocated for your principal (the loan amount) will go up, but your interest payment will decrease in the same amount. The property tax and homeowners insurance will increase over time, but for the most part, payment amounts on these types of loans change little over the life of the loan.
When you first take out a fixed-rate loan, the majority the payment is applied to interest. As you pay , more of your payment is applied to principal.
Borrowers can choose a fixed-rate loan to lock in a low rate. Borrowers select these types of loans when interest rates are low and they wish to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at the best rate currently available. Call First Community Bank of Central Al. at (334) 285-8850 to discuss how we can help.
There are many kinds of Adjustable Rate Mortgages. Generally, interest on ARMs are based on a federal index. Some examples of outside indexes 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 ARMs are capped, which means they can't increase over a certain amount in a given period of time. 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 if the underlying index goes up by more than two percent. Sometimes an ARM has a "payment cap" which guarantees that your payment can't go above a fixed amount over the course of a given year. Most ARMs also cap your rate over the duration of the loan period.
ARMs usually start at a very low rate that may increase over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is fixed 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 often best for borrowers who expect to move in three or five years. These types of adjustable rate loans benefit borrowers who plan to sell their house or refinance before the loan adjusts.
Most people who choose ARMs do so because they want to take advantage of lower introductory rates and don't plan on staying in the house for any longer than the initial low-rate period. ARMs can be risky in a down market because homeowners can get stuck with rates that go up if they cannot sell their home or refinance with a lower property value.
Have questions about mortgage loans? Call us at (334) 285-8850. We answer questions about different types of loans every day.