Differences between adjustable and fixed loans
With a fixed-rate loan, your monthly payment doesn't change for the entire duration of the mortgage. The longer you pay, the more of your payment goes toward principal. The property tax 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 don't increase much.
Your first few years of payments on a fixed-rate loan go mostly toward interest. That gradually reverses as the loan ages.
Borrowers can choose a fixed-rate loan to lock in a low interest rate. Borrowers choose fixed-rate loans when interest rates are low and they want to lock in at this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at a favorable rate. Call Dick Lepre NMLS #302379 at 4152449383 to learn more.
There are many kinds of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.
The majority of ARMs feature this cap, which means they can't go up above a specified amount in a given period of time. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that ensures your payment will not increase beyond a fixed amount in a given year. The majority of ARMs also cap your interest rate over the duration of the loan.
ARMs most often have the lowest, most attractive rates at the start. They provide the lower rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is fixed for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are usually best for borrowers who expect to move in three or five years. These types of ARMs are best for people who plan to move before the loan adjusts.
Most people who choose ARMs do so because they want to take advantage of lower introductory rates and do not plan on staying in the home for any longer than this initial low-rate period. ARMs can be risky in a down market because homeowners could be stuck with rates that go up if they can't sell or refinance at the lower property value.
Have questions about mortgage loans? Call us at 4152449383. We answer questions about different types of loans every day.