Fixed versus adjustable loans
With a fixed-rate loan, your payment never changes for the life of the mortgage. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance will increase over time, but for the most part, payments 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 toward interest. The amount applied to your principal amount increases up gradually every month.
You might choose a fixed-rate loan to lock in a low interest rate. Borrowers choose these types of loans because interest rates are low and they want to lock in this lower 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'd love to assist you in locking a fixed-rate at a favorable rate. Call MidTowne Mortgage at (478) 746-2063 to learn more.
There are many kinds of Adjustable Rate Mortgages. ARMs are normally adjusted twice a year, based on various indexes.
Most programs feature a cap that protects you from sudden increases in monthly payments. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that the payment can increase in one period. Plus, the great majority of ARMs have a "lifetime cap" — your rate can never exceed the capped percentage.
ARMs most often have their lowest, most attractive rates at the start. They usually provide that rate for an initial period that varies greatly. You've probably read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for a certain number of years (3 or 5), then adjust. These loans are often best for borrowers who expect to move within three or five years. These types of ARMs benefit borrowers who will sell their house or refinance before the loan adjusts.
Most people who choose ARMs choose them because they want to get lower introductory rates and don't plan to remain in the home longer than the introductory low-rate period. ARMs are risky if property values decrease and borrowers cannot sell their home or refinance their loan.
Have questions about mortgage loans? Call us at (478) 746-2063. We answer questions about different types of loans every day.