Fixed versus adjustable rate loans
A fixed-rate loan features the same payment amount for the entire duration of the loan. The property taxes and homeowners insurance will increase over time, but generally, payment amounts on fixed rate loans don't increase much.
At the beginning of a a fixed-rate mortgage loan, the majority your payment goes toward interest. The amount applied to your principal amount increases up gradually every month.
Borrowers might choose a fixed-rate loan to lock in a low interest rate. Borrowers choose fixed-rate loans when interest rates are low and they wish to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call Quick Quote Mortgage NMLS #388278 at 866-584-4650 to discuss your situation with one of our professionals.
Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. ARMs usually adjust every six months, based on various indexes.
Most ARMs are capped, which means they won't increase over a certain amount in a given period of time. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than two percent a year, even if the index the rate is based on goes up by more than two percent. Sometimes an ARM features a "payment cap" that guarantees your payment won't go above a certain amount over the course of a given year. In addition, almost all ARM programs have a "lifetime cap" — this cap means that your rate can't ever exceed the capped percentage.
ARMs usually start out at a very low rate that usually increases over time. 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. It then 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 often best for borrowers who expect to move within three or five years. These types of adjustable rate loans most benefit borrowers who plan to sell their house or refinance before the loan adjusts.
You might choose an ARM to get a very low initial rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs can be risky if property values decrease and borrowers cannot sell their home 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!