Differences between adjustable and fixed rate loans
With a fixed-rate loan, your monthly payment stays the same for the entire duration of your mortgage. The longer you pay, the more of your payment goes toward principal. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally monthly payments for your fixed-rate loan will increase very little.
Early in a fixed-rate loan, a large percentage of your payment pays interest, and a much smaller part goes to principal. The amount paid toward your principal amount increases up slowly each month.
Borrowers might choose a fixed-rate loan to lock in a low interest rate. Borrowers select these types of loans when interest rates are low and they wish to lock in this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at a favorable rate. Call Homewithloan.com at 9727982110 for details.
Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs usually adjust every six months, based on various indexes.
Most Adjustable Rate Mortgages feature this cap, so they won't go up above a certain amount in a given period of time. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount that your payment can go up in one period. Plus, almost all adjustable programs feature a "lifetime cap" — this cap means that the rate won't exceed the cap amount.
ARMs most often have their lowest, most attractive rates toward the beginning. They usually guarantee the lower rate from a month to ten years. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is set for three or five years. It then adjusts every year. These kinds of loans are fixed for 3 or 5 years, then adjust. These loans are often best for borrowers who anticipate moving within three or five years. These types of adjustable rate loans benefit people who will move before the loan adjusts.
Most borrowers who choose ARMs choose them when they want to take advantage of lower introductory rates and don't plan to stay in the house longer than the initial low-rate period. ARMs can be risky if property values decrease and borrowers can't sell or refinance.
Have questions about mortgage loans? Call us at 9727982110. It's our job to answer these questions and many others, so we're happy to help!