Fixed versus adjustable loans

A fixed-rate loan features a fixed payment amount for the entire duration of the mortgage. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but generally, payment amounts on fixed rate loans don't increase much.

At the beginning of a a fixed-rate loan, most of the payment goes toward interest. As you pay on the loan, more of your payment goes toward principal.

You can 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 lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call Ruidoso Mortgage at 5752581316 to learn more.

Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. Generally, interest rates for ARMs are based on an outside index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the 1 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 specific amount in a given period of time. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than two percent per year, even though the underlying index increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount your payment can go up in a given period. Almost all ARMs also cap your interest rate over the duration of the loan period.

ARMs usually start at a very low rate that may increase as the loan ages. You've probably read about 5/1 or 3/1 ARMs. For these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are usually best for people who expect to move in three or five years. These types of adjustable rate loans most benefit people who will move before the initial lock expires.

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 initial rate goes up. ARMs can be risky when property values go down and borrowers are unable to sell or refinance their loan.

Have questions about mortgage loans? Call us at 5752581316. It's our job to answer these questions and many others, so we're happy to help!