Fixed versus adjustable loans
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With a fixed-rate loan, your monthly payment stays the same for the life of the mortgage. The portion of the payment allocated to principal (the amount you borrowed) goes up, however, your interest payment will decrease accordingly. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but in general, payments on these types of loans vary little.
Your first few years of payments on a fixed-rate loan are applied primarily to pay interest. The amount paid toward principal goes up slowly each month.
You can choose a fixed-rate loan to lock in a low rate. People select these types of loans when interest rates are low and they want to lock in the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at the best rate currently available. Call West Community Credit Union at 636-720-2432 for details.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. Generally, interest rates for ARMs are based on a federal index. Some examples of outside indexes are: the 6-month Certificate of Deposit (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 programs have a cap that protects you from sudden monthly payment increases. Some ARMs can't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which ensures your payment can't increase beyond a certain amount in a given year. Most ARMs also cap your interest rate over the duration of the loan.
ARMs most often feature their lowest rates toward the beginning. They provide that rate from a month to ten years. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the introductory 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 they adjust. These loans are often best for borrowers who expect to move within three or five years. These types of adjustable rate programs are best for people who plan to sell their house or refinance before the loan adjusts.
Most people who choose ARMs choose them when they want to get lower introductory rates and don't plan to stay in the home for any longer than the introductory low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates when they cannot sell or refinance at the lower property value.
Have questions about mortgage loans? Call us at 636-720-2432. It's our job to answer these questions and many others, so we're happy to help!