Differences between adjustable and fixed loans
With a fixed-rate loan, your payment never changes for the life of your loan. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally monthly payments on your fixed-rate loan will be very stable.
Your first few years of payments on a fixed-rate loan go primarily toward interest. That gradually reverses itself as the loan ages.
You might choose a fixed-rate loan in order to lock in a low rate. Borrowers choose fixed-rate loans because interest rates are low and they wish to lock in the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at the best rate currently available. Call Metro Mortgage at 866-300-1550 to learn more.
Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. ARMs usually adjust twice a year, based on various indexes.
Most programs have a "cap" that protects you from sudden monthly payment increases. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount your monthly payment can increase in a given period. Plus, almost all ARMs have a "lifetime cap" — your interest rate can't go over the cap amount.
ARMs most often have the lowest rates at the start. They guarantee the lower interest rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is set for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then adjust. Loans like this are often best for borrowers who expect to move in three or five years. These types of adjustable rate programs are best for people who will sell their house or refinance before the loan adjusts.
Most borrowers who choose ARMs do so because 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 are risky when property values decrease and borrowers are unable to sell or refinance.
Have questions about mortgage loans? Call us at 866-300-1550. We answer questions about different types of loans every day.