Fixed Rate Loan vs. Adjustable Rate Loan
A fixed rate loan implies that the interest and principal portion of your payment remains constant for the life of the loan while an adjustable rate loan implies periodic changes to your interest rate and your payment. In choosing an adjustable rate loan, you must determine the frequency of rate changes and the amount. The following should assist you in asking the right questions regarding an adjustable rate:
Adjustment Period - This refers to how often your loan can be adjusted. You’ll commonly hear these loans referred to as 1/1, 5/1, 7/1, 10/1, etc.. A 1/1 loan means that it adjusts once every year for the life of the loan. A 5/1 loan means that the loan will remain at the initial rate for the first 5 years and thereafter adjust every 1 year for the remainder of the loan.
Initial Rate - The rate at which the loan begins
Market Index - The benchmark rate that is used each time your loan comes up for adjustment ( 1 year T-bill, Cost of Funds Index, etc. )
Margin - The lender adds a pre-determined amount (margin) to the market index to arrive at the new rate for your loan
Rate Change Limits - Each adjustable rate loan should have maximum change limits to the rate for each adjustment and a limit to the total change over the life of the loan
When choosing an adjustable rate loan, you assume a degree of risk but it could still present you with a better choice than a fixed rate depending upon length of time you’ll live in the home, the current rate environment, etc.
We offer ARMs for both short and long term mortgages.
ARMs offer lower initial interest rates than fixed mortgages for a specified time, and then the rates are adjusted periodically to follow the market. These loans may be ideal if you plan to stay in your home for a short time.
TYPES OF ARMS
Hybrid ARM (3/1 ARM, 5/1 ARM, 7/1 ARM)
These increasingly popular ARMS—also called 3/1, 5/1 or 7/1—can offer the best of both worlds: lower interest rates (like ARMs) and a fixed payment for a longer period of time than most adjustable rate loans. For example, a "5/1 loan" has a fixed monthly payment and interest for the first five years and then turns into a traditional adjustable-rate loan, based on then-current rates for the remaining 25 years. It's a good choice for people who expect to move (or refinance) before or shortly after the adjustment occurs.
Adjustable Rate Mortgages (ARM)
When it comes to ARMs there's a basic rule to remember...the longer you ask the lender to charge you a specific rate, the more expensive the loan.
2/1 Buy Down Mortgage
The 2/1 Buy-Down Mortgage allows the borrower to qualify at below market rates so they can borrow more. The initial starting interest rate increases by 1% at the end of the first year and adjusts again by another 1% at the end of the second year. It then remains at a fixed interest rate for the remainder of the loan term. Borrowers often refinance at the end of the second year to obtain the best long-term rates. However, keeping the loan in place even for three full years or more will keep their average interest rate in line with the original market conditions.
This loan has a rate that is recalculated once a year.
With this loan, the interest rate is recalculated every month. Compared to other options, the rate is usually lower on this ARM because the lender is only committing to a rate for a month at a time, so his vulnerability is significantly reduced.
Negative Amortization (Neg. Am) Loan
This is a deferred-interest loan which is very powerful -- and the most misunderstood mortgage program because of its many options. Basically, the lender allows the borrower to make monthly payments that are less than the accruing interest. Therefore, if the borrower chooses to make the minimum monthly payment, the loan balance will increase by the amount of interest not paid on the loan. The power of this loan lies in the borrower's ability to choose between making the full loan payment, or the minimum payment, or any amount in between. If a borrower's income varies throughout the year (due to commissions, bonuses, etc.), the borrower can make a lower payment during the "lean times", and then make higher payments when funds are readily available.