Differences between fixed and adjustable loans
With a fixed-rate loan, your monthly payment doesn't change for the entire duration of the loan. The longer you pay, the more of your payment goes toward principal. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally monthly payments for your fixed-rate loan will increase very little.
Early in a fixed-rate loan, a large percentage of your monthly payment pays interest, and a much smaller percentage goes to principal. The amount paid toward your principal amount increases up slowly every month.
You can choose a fixed-rate loan to lock in a low rate. People select 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 provide greater consistency in monthly payments. 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 Affinity Mortgage Brokers at 719-331-6278 for details.
There are many different types of Adjustable Rate Mortgages. ARMs are normally adjusted twice a year, based on various indexes.
The majority of Adjustable Rate Mortgages are capped, which means they can't go up above a specific amount in a given period. Some ARMs won't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which guarantees your payment won't go above a certain amount in a given year. Additionally, the great majority of ARMs have a "lifetime cap" — this means that your rate will never exceed the capped percentage.
ARMs most often feature the lowest, most attractive rates at the beginning of the loan. They guarantee that interest rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then they adjust after the initial period. Loans like this are best for borrowers who anticipate moving within three or five years. These types of adjustable rate programs are best for people who will move before the initial lock expires.
Most borrowers who choose ARMs do so when they want to take advantage of lower introductory rates and do not plan on remaining in the house longer than this initial low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates when they cannot sell their home or refinance with a lower property value.
Have questions about mortgage loans? Call us at 719-331-6278. We answer questions about different types of loans every day.