Differences between fixed and adjustable rate loans
A fixed-rate loan features the same payment for the entire duration of your loan. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but generally, payments on these types of loans change little over the life of the loan.
Your first few years of payments on a fixed-rate loan are applied primarily toward interest. As you pay , more of your payment goes toward principal.
Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select these types of loans when interest rates are low and they want to lock in this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at the best rate currently available. Call Financial Edge Mortgage Corp. at 425-508-9988 to discuss your situation with one of our professionals.
There are many types of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.
Most programs have a "cap" that protects borrowers from sudden increases in monthly payments. Some ARMs won't adjust more than two percent 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 the payment can go up in a given period. Plus, the great majority of ARMs have a "lifetime cap" — this means that the rate can't ever exceed the capped percentage.
ARMs most often have their lowest, most attractive rates toward the beginning. They usually guarantee that interest rate from a month to ten years. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the initial rate is set for three or five years. It then adjusts every year. These types of loans are fixed for a certain number of years (3 or 5), then they adjust after the initial period. These loans are often best for people who expect to move in three or five years. These types of adjustable rate programs benefit people who plan to move before the loan adjusts.
You might choose an ARM to take advantage of a lower introductory interest rate and count on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky in a down market because homeowners could be stuck with rates that go up if they can't 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.
Do you have a question regarding a mortgage program?