Differences between adjustable and fixed loans
A fixed-rate loan features a fixed payment amount for the entire duration of your loan. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but for the most part, payment amounts on these types of loans vary little.
At the beginning of a a fixed-rate mortgage loan, the majority your payment goes toward interest. The amount paid toward principal increases up gradually every month.
Borrowers can choose a fixed-rate loan in order to lock in a low rate. Borrowers select these types of loans when interest rates are low and they wish to lock in the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater stability 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 the best rate currently available. Call Dick Lepre NMLS #302379 at 4152449383 for details.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. ARMs usually adjust twice a year, based on various indexes.
The majority of ARMs feature this cap, so they can't increase over a certain amount in a given period of time. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which ensures that your payment will not go above a fixed amount in a given year. Additionally, the great majority of ARMs feature a "lifetime cap" — this means that your rate won't exceed the cap amount.
ARMs usually start at a very low rate that usually increases as the loan ages. You've likely read about 5/1 or 3/1 ARMs. For these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These types of loans are fixed for a number of years (3 or 5), then adjust. Loans like this are best for people who anticipate moving within three or five years. These types of adjustable rate loans benefit borrowers who will sell their house or refinance before the initial lock expires.
Most people who choose ARMs choose them because they want to get lower introductory rates and don't plan on staying in the house longer than this introductory low-rate period. ARMs can be risky if property values decrease and borrowers can't sell their home or refinance.
Have questions about mortgage loans? Call us at 4152449383. We answer questions about different types of loans every day.