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.
Annual ARM
This loan has a rate that is recalculated once a year.
Monthly ARM
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.
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