Differences between adjustable and fixed loans
A fixed-rate loan features a fixed payment for the entire duration of the loan. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part monthly payments on a fixed-rate loan will be very stable.
Your first few years of payments on a fixed-rate loan go primarily toward interest. This proportion reverses as the loan ages.
You might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose fixed-rate loans because interest rates are low and they wish to lock in at this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer 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. Call Tenby J. Dahman The Dahman Team at 3038627760 to learn more.
There are many kinds of Adjustable Rate Mortgages. ARMs are normally adjusted twice a year, based on various indexes.
Most ARMs feature this cap, which means they can't go up over a specific amount in a given period. Some ARMs can't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which ensures your payment will not increase beyond a fixed amount over the course of a given year. Plus, almost all ARMs have a "lifetime cap" — this cap means that the interest rate can't ever go over the cap percentage.
ARMs usually start at a very low rate that usually increases as the loan ages. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are best for borrowers who expect to move in three or five years. These types of ARMs benefit people who will move before the loan adjusts.
Most people who choose ARMs choose them when they want to get lower introductory rates and do not plan on remaining in the house for any longer than the introductory low-rate period. ARMs can be risky if property values decrease and borrowers are unable to sell or refinance their loan.
Have questions about mortgage loans? Call us at 3038627760. We answer questions about different types of loans every day.