Differences between adjustable and fixed rate loans
With a fixed-rate loan, your monthly payment doesn't change for the entire duration of your loan. The portion that goes for your principal (the loan amount) goes up, but the amount you pay in interest will go down accordingly. The property taxes and homeowners insurance will increase over time, but in general, payments on fixed rate loans change little over the life of the loan.
Early in a fixed-rate loan, a large percentage of your monthly payment goes toward interest, and a much smaller part toward principal. The amount paid toward your principal amount increases up slowly every month.
You might choose a fixed-rate loan in order to lock in a low interest rate. People select fixed-rate loans because interest rates are low and they wish to lock in this lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at the best rate currently available. Call Metro Mortgage at 866-300-1550 for details.
There are many types of Adjustable Rate Mortgages. ARMs are normally adjusted twice a year, based on various indexes.
Most programs feature a "cap" that protects you from sudden monthly payment increases. There may be a cap on how much your interest rate can increase in one period. For example: no more than two percent per year, even though the index the rate is based on increases by more than two percent. Sometimes an ARM features a "payment cap" which guarantees that your payment will not increase beyond a fixed amount over the course of a given year. The majority of ARMs also cap your rate over the life of the loan.
ARMs most often feature their lowest, most attractive rates at the start of the loan. They usually provide that 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 introductory 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 people who expect to move in three or five years. These types of adjustable rate programs benefit people who will sell their house or refinance before the loan adjusts.
Most borrowers who choose ARMs do so when they want to take advantage of lower introductory rates and don't plan to stay in the house longer than this introductory low-rate period. ARMs can be risky if property values go down and borrowers can't sell their home or refinance their loan.
Have questions about mortgage loans? Call us at 866-300-1550. It's our job to answer these questions and many others, so we're happy to help!