Which Loan Fits You Best?
30 Year Fixed Rate Loan
A 30 year fixed interest rate is a standout amongst the most attractive mortgage loan programs in the country. Most people look for the low monthly scheduled installments and prefer a 30 year fixed rate mortgage over an Adjustable Rate Mortgage (ARM). Since interest rates are unstable and always move up and down briskly the majority of people like to stay with a constant fixed mortgage interest rate.
A 30 year fixed mortgage loan can be refinanced if the interest rates drop in the future. You can also do a "No Cost Refinance" to a new 30 Year Fixed-Rate.
15 Year Fixed Rate Loan
A 15-year fixed-rate mortgage offers:
The term of 15 years fixed loan program is shorter as compared to 30 years fixed. Thus, monthly installments are higher. However, the mortgage loan amount pays off quickly and you pay considerably less mortgage interest amount over the life of the loan.
Adjustable Rate Loan (ARM)
An adjustable-rate mortgage (ARM) is a loan with an interest rate that can be adjusted at pre-set intervals. The amount of adjustment depends on several factors outlined below.
Adjustable Interest Mortgage (ARM) loans adjust based on the following factors
The index of an ARM is the financial medium that the loan is "attached" to, or adjusted to. The most familiar indices, or, indexes are the LIBOR (London Interbank Offered Rate), 1-Year Treasury Security, 6-Month Certificate of Deposit (CD), Prime, and COFI (the 11th District Cost of Funds). Each of these indices moves up or down based on fluctuations in the financial markets.
The margin is one of the most significant aspects of ARMs because it is added to the index to determine the interest rate that you pay. The margin added to the index is known as the fully indexed rate. As an example, if the current index value is 4.250% and your loan has a margin of 2.0%, your fully indexed rate is 6.250%. Margins on loans range from 1.75% to 3.5% depending on the index and the amount of the loan.
Several loan programs have payment caps as a substitute of interest rate caps. These loan programs diminish payment shock in a rising interest rate market, but can also lead to deferred interest or "negative amortization". Such loans normally cap your annual payment increases to 7.5% of the previous payment.
This limits how the interest rate can be changed each time it is adjusted. The cap is usually between 1 and 2%.
Practically all ARMs have a maximum interest rate or lifetime interest rate cap. However, the limit of lifetime cap varies within each company and different loan programs. Loans with low lifetime caps usually have higher margins.