Fixed versus adjustable rate loans

A fixed-rate loan features a fixed payment amount for the entire duration of the loan. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but in general, payment amounts on these types of loans change little over the life of the loan.

Your first few years of payments on a fixed-rate loan are applied primarily to pay interest. That gradually reverses as the loan ages.

Borrowers might choose a fixed-rate loan to lock in a low interest rate. People select fixed-rate loans because interest rates are low and they want to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more 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 Omni Mortgage Corp. at 718-441-7000 to learn more.

There are many kinds of Adjustable Rate Mortgages. Generally, interest for ARMs are based on a federal index. Some examples of outside indexes are: the 6-month 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 programs feature a cap that protects you from sudden monthly payment increases. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than two percent a year, even if the index the rate is based on goes up by more than two percent. Sometimes an ARM features a "payment cap" that ensures your payment will not increase beyond a fixed amount over the course of a given year. In addition, the great majority of ARM programs have a "lifetime cap" — your rate can't ever go over the capped percentage.

ARMs usually start at a very low rate that usually increases over time. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These kinds of loans are fixed for a number of years (3 or 5), then they adjust. These loans are often best for borrowers who expect to move within three or five years. These types of adjustable rate loans benefit people who plan to move before the initial lock expires.

Most borrowers who choose ARMs do so because they want to take advantage of lower introductory rates and don't plan on staying in the home for any longer than the introductory low-rate period. ARMs can be risky in a down market because homeowners could be stuck with increasing rates when they cannot sell their home or refinance with a lower property value.