Adjustable versus fixed rate loans

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With a fixed-rate loan, your payment remains the same for the entire duration of your mortgage. The portion that goes for your principal (the actual loan amount) increases, however, the amount you pay in interest will go down accordingly. The property tax and homeowners insurance will go up over time, but generally, payments on these types of loans don't increase much.

Early in a fixed-rate loan, a large percentage of your monthly payment pays interest, and a significantly smaller part toward principal. That reverses as the loan ages.

You might choose a fixed-rate loan in order to lock in a low interest rate. People choose fixed-rate loans when interest rates are low and they wish to lock in the low rate. 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'd love to assist you in locking a fixed-rate at the best rate currently available. Call Omni Mortgage Corp. at 718-441-7000 to learn more.

There are many kinds of Adjustable Rate Mortgages. ARMs are normally adjusted twice a year, based on various indexes.

Most ARM programs have a "cap" that protects you from sudden increases in monthly payments. There may be a cap on how much your interest rate can increase in one period. For example: no more than a couple percent per year, even if 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 rate directly, caps the amount that your monthly payment can go up in a given period. The majority of ARMs also cap your interest rate over the duration of the loan.

ARMs usually start at a very low rate that usually increases as the loan ages. You've probably read about 5/1 or 3/1 ARMs. In 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 after the initial period. These loans are usually best for borrowers who anticipate moving within three or five years. These types of adjustable rate loans benefit borrowers who will sell their house or refinance before the initial lock expires.

You might choose an Adjustable Rate Mortgage to get a very low introductory rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs are risky when property values decrease and borrowers can't sell their home or refinance their loan.

Have questions about mortgage loans? Call us at 718-441-7000. We answer questions about different types of loans every day.