Adjustable versus fixed rate loans
With a fixed-rate loan, your payment stays the same for the life of the loan. The amount allocated for principal (the actual loan amount) goes up, however, the amount you pay in interest will decrease accordingly. The property taxes and homeowners insurance will go up over time, but in general, payments on fixed rate loans change little over the life of the loan.
Your first few years of payments on a fixed-rate loan go mostly toward interest. The amount paid toward principal increases up slowly every month.
Borrowers might choose a fixed-rate loan in order to lock in a low rate. Borrowers select fixed-rate loans because interest rates are low and they wish to lock in the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more stability 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 Quick Quote Mortgage NMLS #388278 at 866-584-4650 for details.
There are many types of Adjustable Rate Mortgages. ARMs are generally adjusted twice a year, based on various indexes.
Most Adjustable Rate Mortgages feature this cap, which means they won't increase over a specific amount in a given period. There may be a cap on interest rate variances over the course of a year. For example: no more than a couple percent a year, even if the index the rate is based on goes up by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount the monthly payment can increase in a given period. The majority of ARMs also cap your rate over the duration of the loan period.
ARMs usually start at a very low rate that usually increases over time. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set for three or five years. After this period it adjusts every year. These kinds of loans are fixed for a certain number of years (3 or 5), then they adjust after the initial period. Loans like this are usually best for people who anticipate moving in three or five years. These types of adjustable rate programs most benefit borrowers who will sell their house or refinance before the loan adjusts.
You might choose an ARM to take advantage of a lower initial rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates if they cannot sell their home or refinance at the lower property value.
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!