Differences between fixed and adjustable rate loans
With a fixed-rate loan, your payment never changes for the entire duration of the mortgage. The amount of the payment that goes for principal (the amount you borrowed) increases, but your interest payment will decrease accordingly. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but generally, payments on fixed rate loans change little over the life of the loan.
When you first take out a fixed-rate loan, the majority your payment is applied to interest. That reverses as the loan ages.
You can choose a fixed-rate loan in order to lock in a low rate. People select these types of loans because interest rates are low and they wish to lock in at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at a favorable rate. Call Turnkey Mortgage Group - NMLS#70160
David Yeary, Mortgage Loan Originator NMLS#1837725 at 7133252099 to learn more.
There are many different kinds of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.
Most ARM programs have a cap that protects borrowers from sudden monthly payment increases. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which ensures that your payment will not go above a fixed amount in a given year. Most ARMs also cap your interest rate over the duration of the loan period.
ARMs usually start out at a very low rate that may increase as the loan ages. You may have heard about "3/1 ARMs" or "5/1 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 a number of years (3 or 5), then they adjust. These loans are often best for borrowers who anticipate moving within three or five years. These types of adjustable rate programs most benefit people who plan to sell their house or refinance before the initial lock expires.
Most people who choose ARMs do so because they want to get lower introductory rates and do not plan to stay in the house for any longer than this initial low-rate period. ARMs can be risky in a down market because homeowners could be stuck with increasing rates if they cannot sell their home or refinance at the lower property value.
Have questions about mortgage loans? Call us at 7133252099. We answer questions about different types of loans every day.