Differences between fixed and adjustable rate loans
A fixed-rate loan features the same payment amount for the entire duration of the loan. The property tax and homeowners insurance will go up over time, but for the most part, payments on these types of loans change little over the life of the loan.
When you first take out a fixed-rate mortgage loan, most of your payment is applied to interest. That gradually reverses itself as the loan ages.
Borrowers can choose a fixed-rate loan to lock in a low rate. People choose fixed-rate loans because interest rates are low and they want to lock in at the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at a good rate. Call Tenby J. Dahman at 3038627760 for details.
There are many different kinds of Adjustable Rate Mortgages. ARMs are normally adjusted every six months, based on various indexes.
Most Adjustable Rate Mortgages feature this cap, so they won't increase over a specified amount in a given period of time. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than a couple percent a year, even though the index the rate is based on goes up by more than two percent. Sometimes an ARM features a "payment cap" which guarantees your payment won't go above a certain amount over the course of a given year. Additionally, almost all adjustable programs feature a "lifetime cap" — the rate can't exceed the capped percentage.
ARMs most often have the lowest rates toward the beginning of the loan. They usually guarantee that interest rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is fixed 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 after the initial period. These loans are often best for people who expect to move within three or five years. These types of ARMs benefit people who plan to sell their house or refinance before the initial lock expires.
You might choose an ARM to take advantage of a very low introductory rate and plan on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates if they can't sell their home or refinance with a lower property value.
Have questions about mortgage loans? Call us at 3038627760. We answer questions about different types of loans every day.