Fixed versus adjustable loans
A fixed-rate loan features the same payment for the entire duration of your loan. The property taxes and homeowners insurance will go up over time, but for the most part, payment amounts on these types of loans vary little.
Early in a fixed-rate loan, most of your monthly payment goes toward interest, and a much smaller percentage goes to principal. This proportion gradually reverses as the loan ages.
Borrowers might choose a fixed-rate loan in order to lock in a low rate. People choose these types of loans because interest rates are low and they wish to lock in the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at the best rate currently available. Call Tenby J. Dahman at 3038627760 to discuss how we can help.
There are many kinds of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.
Most programs have a cap that protects borrowers from sudden increases in monthly payments. There may be a cap on interest rate variances over the course of a year. For example: no more than a couple percent per year, even if the index the rate is based on increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount your monthly payment can increase in one period. Additionally, the great majority of adjustable programs have a "lifetime cap" — your interest rate won't go over the cap percentage.
ARMs usually start out at a very low rate that may increase over time. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is set for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then they adjust. Loans like this are usually best for people who anticipate moving within three or five years. These types of adjustable rate programs most benefit people who plan to sell their house or refinance before the loan adjusts.
You might choose an ARM to take advantage of a very low introductory rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up if they cannot sell or refinance with a lower property value.
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!