(Fixed and adjustable rate mortgage (ARM))
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A Conventional Loan means the loan is not insured or guaranteed by the government. A Conventional Loan can either be 20% down and have no mortgage insurance or between 3-19.99% down with mortgage insurance. A conventional-conforming loan adheres to the guidelines of the two major investors, Fannie Mae and Freddie Mac. The current loan limit in the Portland-Metro area is $424,100. Borrowers typically opt for Conventional Loans when they have good credit and/or large downpayment.
A fixed-rate loan features the same payment amount over the life of your mortgage. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part payment amounts on your fixed-rate loan will increase very little.
Early in a fixed-rate loan, a large percentage of your monthly payment pays interest, and a much smaller percentage toward principal. The amount paid toward your principal amount increases up slowly every month.
Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose these types of loans when interest rates are low and they wish to lock in the lower 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 can help you lock in a fixed-rate at the best rate currently available.
There are many different kinds of Adjustable Rate Mortgages. Generally, interest rates on ARMs are based on a federal index, such as the LIBOR (London Interbank Offered Rate).
Most ARM programs feature a cap that protects you from sudden increases in monthly payments. For example, a typical adjustment schedule on a 7/1 ARM is 5-2-5. The "7" in the "7/1" means your rate is fixed for seven years or 84 months and the "1" means your rate will adjust each year after the seven-year fixed period. This means the rate would adjust at month 85 and when it adjusts, the rate can not increase more than 5% over the initial rate in the first adjustment, no more than 2% up or down the year after the first adjustment and capped at 5% for the life of the loan. For example, if your rate during the initial period is 4%, the maximum it could adjust at month 85 is 9%. Assuming it adjusts to 9% that first year, your rate would not go up any higher because 9% is also the maximum. Lets look at another example. If the rate adjusted from 4% to 4.5% at month 85, the following yearly adjustment could only go as high as 6.5%.
Adjustable rate loans benefit people who plan to sell their house or refinance before the initial lock expires. You might choose an ARM to get a lower initial interest rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs are risky if property values decrease and borrowers can't sell their home or refinance their loan like what happened during our most recent recession.
CHA Mortgage Company only recommends ARMs to those with high savings, who can pay off the mortgage if the rates happen to adjust up after the initial fixed period or those who can afford the maximum payment on the loan if the rate were to adjust to the maximum.
Have questions about mortgage loans? Call us at 503-753-7577. It's our job to answer these questions and many others, so we're happy to help!