Differences between fixed and adjustable rate loans
With a fixed-rate loan, your monthly payment never changes for the entire duration of the loan. The portion of the payment that goes to your principal (the loan amount) goes up, however, your interest payment will decrease accordingly. The property taxes and homeowners insurance will go up over time, but for the most part, payment amounts on these types of loans change little over the life of the loan.
Your first few years of payments on a fixed-rate loan go mostly to pay interest. This proportion reverses itself as the loan ages.
You can choose a fixed-rate loan to lock in a low rate. Borrowers select these types of loans when interest rates are low and they wish to lock in the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at a favorable rate. Call Mario Vega at 877-310-6200 for details.
Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs usually adjust twice a year, based on various indexes.
Most Adjustable Rate Mortgages feature this cap, which means they can't increase over a certain amount in a given period. There may be a cap on how much your interest rate can go up in one period. For example: no more than two percent per year, even though the index the rate is based on increases by more than two percent. Sometimes an ARM features a "payment cap" which ensures that your payment can't increase beyond a certain amount in a given year. Almost all ARMs also cap your interest rate over the life of the loan.
ARMs most often feature the lowest rates at the beginning of the loan. They guarantee the lower rate for an initial period that varies greatly. You've likely read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for a number of years (3 or 5), then adjust after the initial period. Loans like this are best for borrowers who expect to move in three or five years. These types of ARMs most benefit borrowers who plan to sell their house or refinance before the loan adjusts.
You might choose an Adjustable Rate Mortgage to get a very low initial interest 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 could be stuck with increasing rates when they cannot sell their home or refinance with a lower property value.
Have questions about mortgage loans? Call us at 877-310-6200. It's our job to answer these questions and many others, so we're happy to help!
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