Adjustable versus fixed loans
A fixed-rate loan features the same payment for the entire duration of the mortgage. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally payment amounts on your fixed-rate loan will increase very little.
At the beginning of a a fixed-rate loan, the majority your payment goes toward interest. As you pay on the loan, more of your payment is applied to principal.
You might choose a fixed-rate loan to lock in a low rate. People select these types of loans because interest rates are low and they want to lock in at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater 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 8668408745 to learn more.
Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. ARMs usually adjust twice a year, based on various indexes.
The majority of ARMs are capped, which means they won't go up above a certain amount in a given period. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that ensures your payment can't go above a fixed amount over the course of a given year. Almost all ARMs also cap your interest rate over the duration of the loan.
ARMs usually start at a very low rate that usually increases as the loan ages. You've probably read about 5/1 or 3/1 ARMs. For these loans, the initial rate is set for three or five years. It then adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are often best for borrowers who expect to move within three or five years. These types of adjustable rate programs most benefit people who plan to sell their house or refinance before the initial lock expires.
Most people who choose ARMs do so because they want to get lower introductory rates and do not plan on remaining in the home longer than this initial low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates when they can't sell their home or refinance at the lower property value.
Have questions about mortgage loans? Call us at 8668408745. We answer questions about different types of loans every day.