Adjustable versus fixed rate loans
A fixed-rate loan features the same payment over the life of your mortgage. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally payments on a fixed-rate loan will increase very little.
During the early amortization period of a fixed-rate loan, most of your payment pays interest, and a significantly smaller percentage goes to principal. As you pay on the loan, more of your payment goes toward principal.
Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select these types of loans because interest rates are low and they want to lock in at the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at a good rate. Call Metro Mortgage at 866-300-1550 to learn more.
There are many different types of Adjustable Rate Mortgages. ARMs are normally adjusted twice a year, based on various indexes.
The majority of Adjustable Rate Mortgages feature this cap, which means they won't increase above a specified amount in a given period of time. There may be 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. Sometimes an ARM has a "payment cap" which ensures that your payment can't go above a certain amount over the course of a given year. In addition, the great majority of ARM programs have a "lifetime cap" — your interest rate can't ever go over the capped percentage.
ARMs usually start at a very low rate that may increase over time. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for a certain number of years (3 or 5), then adjust. These loans are best for people who expect to move within three or five years. These types of ARMs most benefit people who will sell their house or refinance before the initial lock expires.
You might choose an ARM to take advantage of a lower introductory rate and plan on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates if they can't sell their home or refinance at the lower property value.
Have questions about mortgage loans? Call us at 866-300-1550. We answer questions about different types of loans every day.