Differences between fixed and adjustable loans
With a fixed-rate loan, your payment doesn't change for the life of the loan. The amount of the payment allocated for your principal (the amount you borrowed) will increase, but your interest payment will go down accordingly. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally payments on a fixed-rate loan will be very stable.
Early in a fixed-rate loan, a large percentage of your monthly payment pays interest, and a significantly smaller part toward principal. That gradually reverses as the loan ages.
You can choose a fixed-rate loan to lock in a low interest rate. Borrowers choose these types of loans when interest rates are low and they want to lock in this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call Executive Lending Group at 4056158543 for details.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. ARMs are normally adjusted every six months, based on various indexes.
Most ARM programs feature a cap that protects you from sudden monthly payment increases. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount the payment can increase in a given period. Plus, almost all ARM programs feature a "lifetime cap" — this means that the rate can never go over the capped amount.
ARMs most often feature their lowest, most attractive rates at the start. They usually provide that interest rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". In 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 3 or 5 years, then adjust. Loans like this are best for borrowers who anticipate moving in three or five years. These types of adjustable rate loans most benefit borrowers who will sell their house or refinance before the initial lock expires.
You might choose an Adjustable Rate Mortgage to take advantage of a very low initial interest rate and count on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky if property values decrease and borrowers cannot sell their home or refinance.
Have questions about mortgage loans? Call us at 4056158543. We answer questions about different types of loans every day.