Fixed versus adjustable loans
A fixed-rate loan features the same payment for the entire duration of the loan. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part payment amounts for a fixed-rate mortgage will be very stable.
At the beginning of a a fixed-rate loan, the majority the payment goes toward interest. As you pay , more of your payment goes toward principal.
Borrowers might choose a fixed-rate loan to lock in a low rate. Borrowers select these types of loans because interest rates are low and they want to lock in this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into 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 Alerus Mortgage at 952 417 8481 for details.
There are many kinds of Adjustable Rate Mortgages. Generally, interest for ARMs are based on an outside index. Some examples of outside indexes 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 Adjustable Rate Mortgages are capped, which means they can't go up over a specified amount in a given period. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than two percent per year, even though the underlying index increases by more than two percent. Sometimes an ARM features a "payment cap" which ensures your payment won't go above a certain amount over the course of a given year. Additionally, almost all ARMs have a "lifetime cap" — the rate will never go over the capped amount.
ARMs most often have their lowest rates toward the beginning. They guarantee that interest rate for an initial period that varies greatly. You've likely heard of 5/1 or 3/1 ARMs. In these loans, the initial rate is set for three or five years. It then adjusts every year. These types of loans are fixed for a certain number of years (3 or 5), then adjust. These loans are usually best for borrowers who expect to move in three or five years. These types of adjustable rate loans benefit people who plan to sell their house or refinance before the loan adjusts.
You might choose an ARM to take advantage of a very low initial interest rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. ARMs can be risky in a down market because homeowners could be stuck with increasing rates if they cannot sell their home or refinance at the lower property value.
Have questions about mortgage loans? Call us at 952 417 8481. It's our job to answer these questions and many others, so we're happy to help!