Adjustable versus fixed rate loans
A fixed-rate loan features a fixed payment amount over the life of your mortgage. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but generally, payment amounts on these types of loans change little over the life of the loan.
Your first few years of payments on a fixed-rate loan go mostly toward interest. As you pay , more of your payment goes toward principal.
You might choose a fixed-rate loan to lock in a low rate. People choose these types of loans when interest rates are low and they want to lock in this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at a good rate. Call Carter Financial Solutions at 866-840-8745 x2 for details.
There are many different kinds of Adjustable Rate Mortgages. ARMs are generally adjusted twice a year, based on various indexes.
The majority of ARMs feature this cap, which means they can't go up above a certain amount in a given period. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than two percent per year, even if the underlying index goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount your monthly payment can increase in a given period. In addition, almost all ARMs have a "lifetime cap" — this means that the rate can't exceed the cap percentage.
ARMs usually start out at a very low rate that may increase over time. You've likely heard of 5/1 or 3/1 ARMs. In 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 they adjust after the initial period. These loans are usually best for borrowers who anticipate moving in three or five years. These types of adjustable rate programs are best for people who will sell their house or refinance before the loan adjusts.
You might choose an Adjustable Rate Mortgage to get a lower introductory rate and plan on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up when they can't sell their home or refinance with a lower property value.
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!