Adjustable versus fixed loans
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A fixed-rate loan features a fixed payment amount over the life of your loan. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part payment amounts on a fixed-rate mortgage will be very stable.
Your first few years of payments on a fixed-rate loan are applied primarily toward interest. That reverses itself as the loan ages as it does with any fixed rate installment loan.
You might choose a fixed-rate loan to lock in a low rate. People choose fixed-rate loans because interest rates are low and they wish to lock in at this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at the best rate currently available. Call Guaranty Federal Mortgage at 972-334-0566 to discuss your situation with one of our professionals.
There are many different types of Adjustable Rate Mortgages. ARMs are based on specific financial indexes. A few of these are: 6-month LIBOR(London Inter Banking Offered Rate), 6-month Certificate of Deposit (CD) rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others. Most now days are tied to the LIBOR.
The ARM programs we offer all feature a "cap" that protects borrowers from sudden increases in monthly payments. Some ARMs won't increase more than two percent per year over their initial start rate, regardless of the underlying interest rate. The majority of ARMs also cap your rate over the duration of the loan period.
While ARMs are not for everyone they do offer financial flexibility to customers who want to secure lower rates in a rising rate environment like the one we are in currently and that are not looking for long term financing. If you find yourself where you need to secure a lower rate for a shorter period of time then ARM's may be right for you. The most common ARM loans are 3/1, 5/1,7/1 and 10/1. The first number represents how long the rate is guaranteed to be fixed for. The second number represents how often the rate can adjust once the fixed period has expired. In these examples that is once every year. Most consumers believe that ARMs only go up while in fact they can also go down or stay the same. It all depends on the INDEX that they are tied to and how they perform at that specific time. While no one has a crystal ball ARMs do have a valid place in mortgage financing as long as the product meets the clients specific goals and they understand how their particular ARM program works. These loans are often best for people who anticipate moving during the specific time they have chosen or just need more payment flexibility than what a higher fixed rate can offer. We do NOT offer any of these products with a prepayment penalty and they can be refinanced down the road if a clients situations changes to where a fixed rate would make better financial sense.
Have questions about mortgage loans? Call us at 972-334-0566. It's our job to answer these questions and many others, so we're happy to help!