Differences between adjustable and fixed loans
With a fixed-rate loan, your payment remains the same for the entire duration of the mortgage. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance will go up over time, but in general, payment amounts on fixed rate loans change little over the life of the loan.
Your first few years of payments on a fixed-rate loan go primarily to pay interest. This proportion gradually reverses itself as the loan ages.
You can choose a fixed-rate loan to lock in a low rate. People choose fixed-rate loans when interest rates are low and they wish to lock in the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at the best rate currently available. Call My Mortgage Option at 4693224391 for details.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. ARMs are generally adjusted twice a year, based on various indexes.
Most ARM programs feature a "cap" that protects you from sudden increases in monthly payments. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount that the payment can go up in a given period. In addition, the great majority of ARMs feature a "lifetime cap" — your interest rate can't ever go over the capped percentage.
ARMs usually start at a very low rate that may increase over time. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is fixed for three or five years. It then adjusts every year. These types of loans are fixed for a number of years (3 or 5), then they adjust after the initial period. These loans are often best for borrowers who expect to move in three or five years. These types of ARMs are best for people who will move before the loan adjusts.
You might choose an ARM to take advantage of a lower initial rate and count on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs can be risky in a down market because homeowners can get stuck with rates that go up if they can't sell or refinance at the lower property value.
Have questions about mortgage loans? Call us at 4693224391. We answer questions about different types of loans every day.