Mortgage loans fall into two basic categories, fixed and adjustable. A fixed rate loan, by far the most popular choice, is a loan program where the interest rate never changes. A fixed rate loan allows borrowers to more easily plan their financial future because they know what the mortgage payment will be for years to come. Fixed rate loans, as well as adjustable rate loans, can be taken in various terms ranging from 10 years to 30. There are even some 40 year programs available. Easily the most popular term is 30 years, with the 15 year term next in line.
Adjustable rate loans have rates that can and will adjust at some point in the future. But the adjustments must adhere to predetermined guidelines built into the note. For example, a 1-year adjustable rate loan can adjust once per year. A 6-month adjustable can adjust every six months. These adjustments are based upon a specified index, margin and rate caps. A common index is the 1-year Constant Maturity Treasury, or CMT. A common margin is 2.00. When an adjustable rate is soon to adjust, the index is researched and the margin is added to arrive at the new rate until the next adjustment period. For example, if the CMT is 2.00 and the margin is 2.00, the new rate would then be 4.00 percent. These programs also limit the amount of change at each adjustment period. These are called interest rate caps. There can be caps limiting the initial adjustment, the periodic adjustment and the lifetime cap which limits how high the rate can ever be, regardless of the index and margin.
When consumers choose between a fixed rate and an adjustable, it’s often based upon how long the borrowers plan to keep the property. If someone is planning on a long term hold or perhaps buying a retirement home, a fixed rate is likely the better choice. The attraction of an adjustable rate loan is the start rate. Adjustable rate mortgages will have lower start rates compared to a fixed. There are times where this is not the case but historically that’s true. Because rates can change daily, you should call me directly for an up-to-date quote on any mortgage program, whether it’s fixed or adjustable.
But there is also an “in between” program sometimes referred to as a hybrid loan because it’s a cross between a fixed and an adjustable. The most common of these are listed as 3/1, 5/1 and 7/1. There are also 10/1 loans available. They might be a little confusing at first glance but in reality they’re easy to understand. With a 3/1 loan for example, the rate is fixed for three years before turning into an adjustable rate loan which can adjust annually. A 5/1 loan is fixed for five years and so on. Borrowers who would like a lower start rate but not sure about having a rate that can adjust one year from now can select one of these programs. For instance, a 5/1 loan might be at 3.00 percent while a 30 year fixed is at 3.50 percent.
These programs can be an ideal choice for those who plan on keeping a property for just a few years and not holding onto the property for the long haul. But don’t venture into these options on your own, you should call me directly and let’s talk about your plans and we can work together to select your better options.