Differences between fixed and adjustable rate loans
With a fixed-rate loan, your payment never changes for the life of your loan. The amount of the payment allocated for principal (the actual loan amount) will go up, however, the amount you pay in interest will decrease in the same amount. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally monthly payments for your fixed-rate loan will be very stable.
Early in a fixed-rate loan, a large percentage of your monthly payment pays interest, and a much smaller part toward principal. As you pay , more of your payment goes toward principal.
You might choose a fixed-rate loan to lock in a low interest rate. Borrowers select these types of loans because interest rates are low and they want to lock in the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more monthly payment stability. 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 Financial Edge Mortgage Corp. at 425-508-9988 for details.
There are many different types of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.
Most ARMs feature this cap, so they won't go up over a specific amount in a given period. Some ARMs can't increase more than 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount your payment can go up in one period. Plus, the great majority of ARMs have a "lifetime cap" — this means that your rate can't go over the cap percentage.
ARMs most often have the lowest, most attractive rates toward the beginning of the loan. They guarantee the lower rate from a month to ten years. You may have heard about "3/1 ARMs" or "5/1 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 3 or 5 years, then adjust after the initial period. Loans like this are best for borrowers who anticipate moving in three or five years. These types of ARMs most benefit borrowers who plan to move before the initial lock expires.
Most people who choose ARMs choose them because they want to take advantage of lower introductory rates and don't plan on remaining in the house longer than the initial low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up if they cannot sell their home or refinance at the lower property value.
Have questions about mortgage loans? Call us at 425-508-9988. We answer questions about different types of loans every day.