Differences between adjustable and fixed loans
With a fixed-rate loan, your payment doesn't change for the life of the mortgage. The portion that goes for your principal (the loan amount) will increase, however, your interest payment will go down 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 mortgage will be very stable.
During the early amortization period of a fixed-rate loan, most of your payment goes toward interest, and a significantly smaller part goes to principal. The amount paid toward principal increases up gradually every month.
You can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose fixed-rate loans because interest rates are low and they want to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at a favorable rate. Call Financial Edge Mortgage Corp. at 425-508-9988 to learn more.
There are many different types of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.
The majority of ARMs are capped, which means they can't go up above a specified amount in a given period of time. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which guarantees that your payment can't increase beyond a certain amount in a given year. In addition, the great majority of adjustable programs feature a "lifetime cap" — this means that your interest rate won't exceed the capped amount.
ARMs usually start out at a very low rate that usually increases over time. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for a number of years (3 or 5), then adjust after the initial period. These loans are best for people who expect to move in three or five years. These types of adjustable rate loans benefit people who will move before the loan adjusts.
Most borrowers who choose ARMs choose them because they want to take advantage of lower introductory rates and do not plan to remain in the home longer than this initial low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates when they can't sell their home or refinance with a lower property value.
Have questions about mortgage loans? Call us at 425-508-9988. It's our job to answer these questions and many others, so we're happy to help!
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