Adjustable versus fixed rate loans
A fixed-rate loan features the same payment amount over the life of your mortgage. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but in general, payments on these types of loans vary little.
Your first few years of payments on a fixed-rate loan go primarily toward interest. The amount applied to your principal amount increases up gradually each month.
Borrowers can choose a fixed-rate loan to lock in a low rate. Borrowers choose fixed-rate loans because 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 more stability 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 the best rate currently available. Call Great Mortgage NMLS#478647 at 708.966.9005 to discuss how we can help.
Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs are normally adjusted twice a year, based on various indexes.
The majority of Adjustable Rate Mortgages feature this cap, so they won'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 has a "payment cap" which ensures your payment will not increase beyond a certain amount over the course of a given year. The majority of ARMs also cap your rate over the life of the loan.
ARMs most often have the lowest, most attractive rates at the start of the loan. They usually guarantee the lower interest rate for an initial period that varies greatly. You've likely heard of 5/1 or 3/1 ARMs. In these loans, the initial 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 adjust. These loans are usually best for people who anticipate moving within three or five years. These types of adjustable rate loans are best for borrowers who will sell their house or refinance before the initial lock expires.
Most people who choose ARMs do so when they want to get lower introductory rates and do not plan on staying in the house for any longer than the introductory low-rate period. ARMs are risky if property values decrease and borrowers are unable to sell or refinance their loan.
Have questions about mortgage loans? Call us at 708.966.9005. We answer questions about different types of loans every day.