Adjustable versus fixed loans
With a fixed-rate loan, your payment never changes for the entire duration of your loan. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally payments on your fixed-rate mortgage will increase very little.
When you first take out a fixed-rate loan, the majority the payment goes toward interest. That reverses as the loan ages.
You can choose a fixed-rate loan in order to lock in a low rate. Borrowers select these types of 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 offer greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at the best rate currently available. Call MidTowne Mortgage at 4787462063 to discuss your situation with one of our professionals.
There are many different types of Adjustable Rate Mortgages. ARMs are generally adjusted every six months, based on various indexes.
Most programs feature a "cap" that protects borrowers from sudden monthly payment increases. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than a couple percent per year, even if the index the rate is based on goes up by more than two percent. Sometimes an ARM has a "payment cap" that guarantees your payment will not increase beyond a fixed amount over the course of a given year. In addition, the great majority of ARM programs feature a "lifetime cap" — the rate won't go over the cap amount.
ARMs most often feature their lowest rates toward the beginning of the loan. They provide that interest rate from a month to ten years. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These kinds of loans are fixed for 3 or 5 years, then adjust. Loans like this are best for people who expect to move in three or five years. These types of ARMs benefit borrowers who will move before the loan adjusts.
You might choose an Adjustable Rate Mortgage to get a lower introductory interest rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky if property values decrease and borrowers are unable to sell their home or refinance their loan.
Have questions about mortgage loans? Call us at 4787462063. We answer questions about different types of loans every day.