Adjustable versus fixed loans
A fixed-rate loan features the same payment amount over the life of the loan. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part payments for a fixed-rate loan will be very stable.
When you first take out a fixed-rate loan, most of the payment is applied to interest. That gradually reverses itself as the loan ages.
Borrowers can choose a fixed-rate loan in order to lock in a low rate. Borrowers choose fixed-rate loans when interest rates are low and they want to lock in at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at a good rate. Call Metro Mortgage at 866-300-1550 for details.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. ARMs usually adjust every six months, based on various indexes.
Most Adjustable Rate Mortgages are capped, so they won't increase over a specific amount in a given period of time. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than two 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 guarantees your payment can't increase beyond a certain amount over the course of a given year. Additionally, the great majority of ARM programs have a "lifetime cap" — this means that the interest rate can never go over the cap percentage.
ARMs most often feature the lowest rates at the beginning of the loan. They provide that rate for an initial period that varies greatly. You've probably 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 types of loans are fixed for 3 or 5 years, then they adjust. Loans like this are often best for borrowers who expect to move in three or five years. These types of adjustable rate programs benefit borrowers who will sell their house or refinance before the loan adjusts.
You might choose an ARM to get a lower introductory rate and count on moving, refinancing or simply 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 cannot sell 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.