Differences between fixed and adjustable rate loans
A fixed-rate loan features a fixed payment amount for the entire duration of the mortgage. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but generally, payments on fixed rate loans vary little.
Your first few years of payments on a fixed-rate loan are applied primarily toward interest. The amount paid toward principal goes up slowly every month.
Borrowers can choose a fixed-rate loan to lock in a low rate. Borrowers choose fixed-rate loans because interest rates are low and they want to lock in the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at a good rate. Call Tenby J. Dahman at 3038627760 for details.
Adjustable Rate Mortgages — ARMs, come in many varieties. ARMs are generally adjusted every six months, based on various indexes.
Most Adjustable Rate Mortgages feature this cap, so they won't increase above a specific amount in a given period of time. There may be a cap on how much your interest rate can go up in one period. For example: no more than a couple percent per year, even though the underlying index goes up by more than two percent. Sometimes an ARM has a "payment cap" that ensures your payment won't increase beyond a fixed amount in a given year. Plus, the great majority of adjustable programs have a "lifetime cap" — your rate can't exceed the cap percentage.
ARMs most often have the lowest, most attractive rates at the beginning of the loan. They provide that rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are usually best for people who anticipate moving in three or five years. These types of adjustable rate programs benefit people who will sell their house or refinance before the initial lock expires.
Most people who choose ARMs choose them when they want to get lower introductory rates and do not plan to remain in the home longer than the initial low-rate period. ARMs are risky when property values decrease and borrowers cannot sell or refinance their loan.
Have questions about mortgage loans? Call us at 3038627760. We answer questions about different types of loans every day.