Differences between fixed and adjustable rate loans
A fixed-rate loan features the same payment amount over the life of your 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 for a fixed-rate mortgage will increase very little.
Early in a fixed-rate loan, a large percentage of your payment pays interest, and a significantly smaller part goes to principal. The amount paid toward your principal amount increases up gradually each month.
Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. People select fixed-rate loans because interest rates are low and they wish to lock in this low rate. For homeowners who have an 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 the best rate currently available. Call Carter Financial Solutions at 866-840-8745 x2 for details.
There are many types of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.
Most ARM programs feature a cap that protects you from sudden monthly payment increases. There may be a cap on how much your interest rate can increase in one period. For example: no more than two percent per year, even though the index the rate is based on increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount your monthly payment can go up in one period. Additionally, almost all ARMs feature a "lifetime cap" — this cap means that the rate can't go over the capped percentage.
ARMs most often have the lowest, most attractive rates toward the beginning of the loan. They provide that rate from a month to ten years. You've likely heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These loans are fixed for a number of years (3 or 5), then they adjust. These loans are usually best for borrowers who expect to move in three or five years. These types of ARMs most benefit people who will sell their house or refinance before the initial lock expires.
You might choose an Adjustable Rate Mortgage to get a very low initial interest rate and plan on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs can be risky if property values decrease and borrowers cannot sell or refinance.
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!