Adjustable versus fixed loans
With a fixed-rate loan, your monthly payment doesn't change for the life of the loan. The amount of the payment allocated to your principal (the loan amount) will increase, however, the amount you pay in interest will decrease accordingly. The property tax and homeowners insurance will increase over time, but for the most part, payment amounts on these types of loans vary little.
Your first few years of payments on a fixed-rate loan go primarily toward interest. The amount paid toward your principal amount increases up slowly every month.
You can choose a fixed-rate loan to lock in a low rate. Borrowers choose these types of loans because 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 provide greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at the best rate currently available. Call The Lending Source at 9736012122 to learn more.
There are many types of Adjustable Rate Mortgages. ARMs are generally adjusted every six months, based on various indexes.
Most programs have a "cap" that protects you from sudden increases in monthly payments. 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 if the index the rate is based on goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount the monthly payment can go up in a given period. In addition, almost all adjustable programs have a "lifetime cap" — the interest rate can't exceed the cap amount.
ARMs most often feature the lowest rates at the beginning. They provide that 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. After this period it adjusts every year. These types of loans are fixed for a number of years (3 or 5), then adjust after the initial period. Loans like this are often best for borrowers who expect to move in three or five years. These types of adjustable rate programs most benefit borrowers who plan to move 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 the introductory low-rate period. ARMs can be risky in a down market because homeowners could be 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 9736012122. We answer questions about different types of loans every day.