Fixed versus adjustable rate loans
A fixed-rate loan features the same payment amount for the entire duration of the loan. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part payments for your fixed-rate mortgage will be very stable.
During the early amortization period of a fixed-rate loan, most of your monthly payment goes toward interest, and a much smaller percentage goes to principal. The amount paid toward your principal amount goes up slowly every month.
You can choose a fixed-rate loan in order to lock in a low rate. Borrowers choose these types of loans because 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 offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at the best rate currently available. Call Tenby J. Dahman The Dahman Team at 3038627760 to discuss how we can help.
Adjustable Rate Mortgages — ARMs, come in many varieties. ARMs usually adjust twice a year, based on various indexes.
Most ARM programs have a cap that protects borrowers from sudden increases in monthly payments. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that ensures your payment can't go above a certain amount in a given year. Additionally, almost all ARMs feature a "lifetime cap" — the rate can't exceed the cap percentage.
ARMs most often have their lowest, most attractive rates at the start. They usually provide the lower interest rate from a month to ten years. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the initial rate is set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are best for people who expect to move in three or five years. These types of adjustable rate programs most benefit people who will move before the initial lock expires.
Most borrowers who choose ARMs do so because they want to get lower introductory rates and do not plan to stay in the home longer than the introductory low-rate period. ARMs are risky when property values go down and borrowers cannot sell their home or refinance their loan.
Have questions about mortgage loans? Call us at 3038627760. It's our job to answer these questions and many others, so we're happy to help!