Adjustable versus fixed rate loans
A fixed-rate loan features a fixed payment for the entire duration of your mortgage. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part payment amounts on your fixed-rate mortgage will increase very little.
Your first few years of payments on a fixed-rate loan are applied mostly to pay interest. As you pay , more of your payment goes toward principal.
Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. People choose these types of loans because interest rates are low and they wish to lock in this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at a good rate. Call Executive Lending Group at 4056158543 for details.
Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. ARMs are generally adjusted twice a year, based on various indexes.
Most programs feature a "cap" that protects you from sudden increases in monthly payments. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than two percent per year, even though the index the rate is based on goes up by more than two percent. Sometimes an ARM features a "payment cap" which guarantees your payment will not increase beyond a fixed amount in a given year. In addition, the great majority of ARMs feature a "lifetime cap" — this means that your interest rate can't exceed the cap percentage.
ARMs most often feature the lowest, most attractive rates toward the beginning. They usually provide the lower interest rate for an initial period that varies greatly. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the initial rate is set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust. These loans are best for borrowers who anticipate moving within three or five years. These types of ARMs benefit borrowers who will sell their house or refinance before the loan adjusts.
Most people who choose ARMs choose them when they want to take advantage of lower introductory rates and don't plan to stay in the house for any longer than this introductory low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates if they can't sell or refinance with a lower property value.
Have questions about mortgage loans? Call us at 4056158543. It's our job to answer these questions and many others, so we're happy to help!