Adjustable versus fixed loans
A fixed-rate loan features the same payment amount over the life of the loan. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally payments on your fixed-rate mortgage will be very stable.
During the early amortization period of a fixed-rate loan, a large percentage of your monthly payment goes toward interest, and a much smaller part goes to principal. The amount applied to principal goes up gradually every month.
You might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose fixed-rate loans when 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 greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at the best rate currently available. Call Homewithloan.com at 9727982110 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 Adjustable Rate Mortgages feature this cap, which means they won't go up over a specified amount in a given period. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount your payment can increase in a given period. Most ARMs also cap your interest rate over the duration of the loan period.
ARMs usually start at a very low rate that may increase as the loan ages. You've probably heard of 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are often best for borrowers who anticipate moving in three or five years. These types of adjustable rate programs are best for borrowers who plan to sell their house or refinance before the initial lock expires.
Most people who choose ARMs do so when they want to take advantage of lower introductory rates and don't plan to stay in the house longer than this initial low-rate period. ARMs can be risky in a down market because homeowners could be stuck with rates that go up if they cannot sell or refinance with a lower property value.
Have questions about mortgage loans? Call us at 9727982110. We answer questions about different types of loans every day.