Differences between adjustable and fixed rate loans
With a fixed-rate loan, your monthly payment doesn't change for the entire duration of the mortgage. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally payment amounts for a fixed-rate loan will increase very little.
Your first few years of payments on a fixed-rate loan are applied mostly toward interest. As you pay , more of your payment goes toward principal.
You can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose these types of loans because interest rates are low and they want to lock in at this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater stability in monthly payments. 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 Firelight Mortgage Consultants at 3032282254 to discuss how we can help.
There are many kinds of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.
Most ARMs feature this cap, which means they can't increase over a specific amount in a given period. Some ARMs won't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that guarantees your payment can't go above a certain amount in a given year. Additionally, the great majority of adjustable programs have a "lifetime cap" — your rate won't exceed the cap amount.
ARMs usually start out at a very low rate that may increase over time. You've probably read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is set 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 usually best for borrowers who anticipate moving within three or five years. These types of adjustable rate programs benefit people who will sell their house or refinance before the loan adjusts.
You might choose an Adjustable Rate Mortgage to take advantage of a lower initial rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky in a down market because homeowners could be stuck with rates that go up when they cannot sell or refinance at the lower property value.
Have questions about mortgage loans? Call us at 3032282254. It's our job to answer these questions and many others, so we're happy to help!