Differences between adjustable and fixed rate loans
With a fixed-rate loan, your payment stays the same for the life of your loan. The portion of the payment allocated for your principal (the actual loan amount) will increase, however, the amount you pay in interest will decrease in the same amount. The property taxes and homeowners insurance will increase over time, but for the most part, payments on these types of loans vary little.
Your first few years of payments on a fixed-rate loan go primarily toward interest. The amount paid toward principal goes up slowly each month.
You might choose a fixed-rate loan in order to lock in a low rate. Borrowers 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 with a fixed-rate loan can offer greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at a favorable rate. Call Custom Lending Group at 7072522700 to discuss how we can help.
Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. ARMs are normally adjusted every six months, based on various indexes.
Most programs have a cap that protects borrowers from sudden increases in monthly payments. 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 though the index the rate is based on increases by more than two percent. Sometimes an ARM features a "payment cap" that ensures that your payment can't go above a certain amount in a given year. Almost all ARMs also cap your interest rate over the life of the loan period.
ARMs usually start out at a very low rate that may increase as the loan ages. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is fixed 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 anticipate moving within three or five years. These types of ARMs most benefit people who plan to move before the loan adjusts.
You might choose an ARM to take advantage of a lower introductory interest rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs can be risky if property values decrease and borrowers cannot sell or refinance their loan.
Have questions about mortgage loans? Call us at 7072522700. It's our job to answer these questions and many others, so we're happy to help!