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 principal (the loan amount) increases, however, your interest payment will decrease accordingly. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. For the most part monthly payments on your fixed-rate loan will be very stable.
Early in a fixed-rate loan, a large percentage of your payment goes toward interest, and a significantly smaller percentage goes to principal. This proportion gradually reverses as the loan ages.
You might choose a fixed-rate loan to lock in a low interest rate. People choose these types of loans because interest rates are low and they want to lock in this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide 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 the best rate currently available. Call Financial Edge Mortgage Corp. at 425-508-9988 to discuss how we can help.
There are many types of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.
Most ARMs are capped, which means they can't go up above a specific amount in a given period of time. There may be a cap on interest rate variances over the course of a year. For example: no more than two percent per year, even though the underlying index goes up by more than two percent. Sometimes an ARM features a "payment cap" that guarantees your payment can't increase beyond a certain amount in a given year. Plus, the great majority of adjustable programs feature a "lifetime cap" — your rate can't go over the capped percentage.
ARMs usually start at a very low rate that may increase over time. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for a certain number of years (3 or 5), then they adjust after the initial period. These loans are usually best for people who anticipate moving within three or five years. These types of ARMs most benefit borrowers who will sell their house or refinance before the initial lock expires.
You might choose an ARM to get a lower initial interest rate and count on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs can be risky in a down market because homeowners could be stuck with increasing rates if they cannot sell or refinance with a lower property value.
Have questions about mortgage loans? Call us at 425-508-9988. We answer questions about different types of loans every day.
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