Differences between fixed and adjustable rate loans
A fixed-rate loan features the same payment over the life of the loan. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part monthly payments for a 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 toward principal. As you pay , more of your payment is applied to principal.
Borrowers might choose a fixed-rate loan to lock in a low rate. Borrowers select fixed-rate loans because interest rates are low and they wish to lock in this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at a good rate. Call Howard Financial at (610) 889-7467 for details.
There are many types of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.
Most Adjustable Rate Mortgages feature this cap, which means they won't go up above a certain amount in a given period. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than a couple percent per year, even though the index the rate is based on increases by more than two percent. Sometimes an ARM has a "payment cap" which guarantees your payment will not increase beyond a certain amount in a given year. Almost all ARMs also cap your interest rate over the life of the loan period.
ARMs most often have the lowest rates toward the beginning of the loan. They guarantee that rate from a month to ten years. You've likely heard of 5/1 or 3/1 ARMs. In 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 adjust. These loans are best for borrowers who expect to move in three or five years. These types of adjustable rate loans most benefit borrowers who plan to sell their house or refinance before the loan adjusts.
Most people who choose ARMs choose them when they want to get lower introductory rates and do not plan on staying in the home longer than this initial low-rate period. ARMs can be risky in a down market because homeowners could be stuck with increasing rates if they can't sell their home or refinance with a lower property value.
Have questions about mortgage loans? Call us at (610) 889-7467. It's our job to answer these questions and many others, so we're happy to help!