Differences between adjustable and fixed rate loans
A fixed-rate loan features a fixed payment over the life of the mortgage. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but generally, payments on fixed rate loans vary little.
Your first few years of payments on a fixed-rate loan go primarily toward interest. That reverses as the loan ages.
You can choose a fixed-rate loan in order to lock in a low rate. Borrowers choose fixed-rate loans because interest rates are low and they want to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at a favorable rate. Call Quick Quote Mortgage Inc NMLS #388278 at 866-584-4650 to learn more.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. ARMs are generally adjusted every six months, based on various indexes.
Most ARMs are capped, so they can't increase over a specific amount in a given period. There may be a cap on interest rate increases over the course of a year. For example: no more than two percent per year, even if the underlying index increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that the payment can increase in a given period. Plus, almost all ARM programs feature a "lifetime cap" — this cap means that your interest rate can't ever go over the capped percentage.
ARMs usually start out at a very low rate that may increase over time. You've likely read about 5/1 or 3/1 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. These loans are often best for borrowers who expect to move within three or five years. These types of adjustable rate programs most benefit borrowers who will move before the initial lock expires.
You might choose an Adjustable Rate Mortgage to get a lower introductory interest rate and plan on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs can be risky when property values decrease and borrowers cannot sell or refinance their loan.
Have questions about mortgage loans? Call us at 866-584-4650. It's our job to answer these questions and many others, so we're happy to help!