Types Of Loan Programs Fixed vs Adjustable

Types Of Loan Programs Fixed vs Adjustable

One of the first choices a homebuyer will need to make is whether you want a fixed-rate or an adjustable-rate mortgage loan. The bulk of loans will fit into one of these two categories, however, there is a third option that will allow you to “hybrid” the two.

Of Course the 30 year fixed is the most popular loan program, but Adjustable Rate Mortgages can sometimes be a good fit.

An adjustable-rate mortgage, (ARM): The interest rate of the mortgage adjusts periodically based on market conditions. For example, your payment will go up if rates go up and go down if rates go down. Fixed-rate Mortgage: Unlike an adjustable-rate mortgage the interest rate is set at the time you take out the loan and will not change. Fixed-rate home loans can be 10 years, 15 years, 20 years or 30 years fixed. 30-year fixed is the most common because it allows your mortgage payment to be the lowest. Hybrid ARM: Features an initial fixed interest rate for a certain amount of time and then becomes an adjustable-rate for the remainder of the term. Standard terms are 5, 7, or 10 yrs.

 

  • On ARM loans, as interest rates rise and fall, your monthly payments adjust accordingly. Lenders may offer lower initial interest rates for ARMs. However it’s important to know, and to weigh the risk, that future increases in interest rates could lead to higher monthly payments.
  • The initial rate and payment on an ARM remains the same for a limited period of time at the beginning of the loan. Most ARMs are 30 year loans with rates and payments fixed for the first 5, 7 or 10 years. After that, they usually adjust every year.
  • Interest rates on an ARM are made up of the index and margin. The index is a measure of interest rates. For conforming loans the SOFR index is used and this adjusts every 6 months. The margin is an additional amount that the lender adds on top of the interest rate. The good news is that payments on an ARM are limited by the caps that set how high or low your rate can go. Not all ARMs will adjust downward so be sure to read the fine print.

 

Here is an example. The 7 Year ARM can be a good fit for some people. In today’s market this ARM offers a lower introductory rate than the 30 year fixed. The payments are fixed for the first 7 years. So the rate will only change after you have made 7 years of payments. This locks in your savings for the first 7 years. So you can take advantage of this lower rate. This is advisable for someone who does not plan to have the loan in 7 years. So it is great based on the short term. Or this can be recommended for someone who will pay the balance down substantially in the first 7 years. When the interest rate adjusts it is calculated off the new loan balance. So if the loan balance was paid down your payment could go down, even if the interest rate went up. Contact us for more information.

Most 7 Year ARM programs have a life cap of 5%. That means the interest rate can adjust 5% higher than the original start rate. If your loan started at an interest rate of 4% the highest the interest rate could ever adjust to is 9%. This life cap is usually effective on the very first time the loan adjusts. So there could be a large jump up in the rate after 7 years. This depends on market conditions. If the rate did not adjust by 5% at the first adjustment there is a 2% annual cap. But the 2% annual cap does not apply to the first adjustment, only the next annual adjustments. Please contact us for more information on ARM programs.

 

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Chad Noble -Mortgage Lender
NMLS 488846

Cornerstone Home Lending, Inc.
Company NMLS 2258

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Equal Housing Lender

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Chad Noble - Your Summit County Mortgage Lender
409 E Main St
Frisco, CO 80443
(970) 390-4084