Differences between adjustable and fixed loans
With a fixed-rate loan, your monthly payment doesn't change for the life of the mortgage. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally payments for your fixed-rate mortgage will be very stable.
When you first take out a fixed-rate mortgage loan, most of your payment is applied to interest. As you pay , more of your payment is applied to principal.
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 lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at a good rate. Call Carter Financial Solutions at 866-840-8745 x2 to learn more.
There are many different types of Adjustable Rate Mortgages. ARMs are generally adjusted twice a year, based on various indexes.
Most programs feature a cap that protects you from sudden monthly payment increases. There may be a cap on interest rate variances over the course of a year. For example: no more than two percent a year, even though the underlying index increases by more than two percent. Sometimes an ARM has a "payment cap" which guarantees your payment will not increase beyond a fixed amount in a given year. Almost all ARMs also cap your rate over the duration of the loan period.
ARMs most often feature their lowest rates toward the start of the loan. They usually provide the lower rate from a month to ten years. You've likely read about 5/1 or 3/1 ARMs. In 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 adjust after the initial period. These loans are best for people who expect to move in three or five years. These types of adjustable rate loans are best for borrowers who plan to move before the loan adjusts.
You might choose an ARM to get a lower initial rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs can be risky when property values go down and borrowers can't sell or refinance their loan.
Have questions about mortgage loans? Call us at 866-840-8745 x2. It's our job to answer these questions and many others, so we're happy to help!
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