Fixed versus adjustable loans
With a fixed-rate loan, your monthly payment never changes for the entire duration of your mortgage. The amount allocated to principal (the actual loan amount) will go up, but the amount you pay in interest will go down accordingly. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally payments on your fixed-rate mortgage will be very stable.
Your first few years of payments on a fixed-rate loan go primarily toward interest. The amount applied to your principal amount goes up slowly each month.
Borrowers might choose a fixed-rate loan to lock in a low rate. Borrowers select these types of loans because interest rates are low and they want to lock in this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call Quick Quote Mortgage Inc NMLS #388278 at 866-584-4650 to learn more.
There are many different types of Adjustable Rate Mortgages. ARMs are normally adjusted every six months, based on various indexes.
Most ARM programs have a cap that protects borrowers from sudden increases in monthly payments. There may be a cap on how much your interest rate can increase in one period. For example: no more than two percent per year, even though the underlying index goes up 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 go up in one period. Most ARMs also cap your interest rate over the duration of the loan period.
ARMs most often have their lowest, most attractive rates at the start. They usually provide that rate from a month to ten years. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the initial rate is set for three or five years. It then adjusts every year. These loans are fixed for a certain number of years (3 or 5), then they adjust after the initial period. These loans are often best for borrowers who expect to move within three or five years. These types of adjustable rate programs benefit people who will sell their house or refinance before the loan adjusts.
Most borrowers who choose ARMs do so when they want to get lower introductory rates and do not plan to stay in the house for any longer than the initial low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up if they cannot sell or refinance with a 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!