Differences between adjustable and fixed loans
With a fixed-rate loan, your monthly payment doesn't change for the life of the loan. The portion of the payment that goes for principal (the loan amount) will increase, however, the amount you pay in interest will go down in the same amount. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part payment amounts for a fixed-rate mortgage will be very stable.
When you first take out a fixed-rate loan, the majority your payment goes toward interest. The amount applied to principal goes up slowly each month.
You can choose a fixed-rate loan in order to lock in a low rate. Borrowers select fixed-rate loans because interest rates are low and they want to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at a favorable rate. Call Great Mortgage NMLS#478647 at 708.966.9005 to discuss your situation with one of our professionals.
There are many different types of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.
Most ARM programs have a cap that protects you from sudden increases in monthly payments. There may be a cap on interest rate variances over the course of a year. For example: no more than two percent per year, even though the underlying index goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount the monthly payment can go up in a given period. Additionally, almost all ARM programs have a "lifetime cap" — the interest rate will never exceed the capped amount.
ARMs usually start at a very low rate that usually increases as the loan ages. You've probably heard of 5/1 or 3/1 ARMs. In 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 often best for people who expect to move in three or five years. These types of adjustable rate programs benefit people who will sell their house or refinance before the initial lock expires.
You might choose an ARM to get a very low initial rate and count on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs can be risky in a down market because homeowners can get stuck with increasing rates when they can't sell or refinance at the lower property value.
Have questions about mortgage loans? Call us at 708.966.9005. We answer questions about different types of loans every day.