Differences between fixed and adjustable rate loans
With a fixed-rate loan, your payment doesn't change for the entire duration of the mortgage. The portion of the payment allocated for your principal (the amount you borrowed) will increase, however, the amount you pay in interest will decrease accordingly. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part payment amounts on a fixed-rate loan will be very stable.
When you first take out a fixed-rate mortgage loan, the majority your payment is applied to interest. As you pay , more of your payment goes toward principal.
You can choose a fixed-rate loan in order to lock in a low rate. People select these types of loans when interest rates are low and they want to lock in at this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call Howard Financial at (610) 889-7467 for details.
Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs usually adjust every six months, based on various indexes.
The majority of ARMs feature this cap, which means they won't go up over a certain amount in a given period of time. Your ARM may feature a cap on interest rate variances 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. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that the monthly payment can go up in a given period. Plus, the great majority of ARM programs feature a "lifetime cap" — this cap means that your interest rate won't exceed the capped percentage.
ARMs usually start out at a very low rate that usually increases as the loan ages. You've likely heard of 5/1 or 3/1 ARMs. In these loans, the initial rate is set for three or five years. It then adjusts every year. These types of loans are fixed for a number of years (3 or 5), then they adjust. Loans like this are often best for borrowers who expect to move within three or five years. These types of adjustable rate programs benefit people who will sell their house or refinance before the initial lock expires.
Most borrowers who choose ARMs choose them when they want to take advantage of lower introductory rates and don't plan to remain in the home for any longer than this initial low-rate period. ARMs can be risky in a down market because homeowners can get stuck with rates that go up when they cannot 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!