Differences between adjustable and fixed rate loans
A fixed-rate loan features the same payment for the entire duration of the loan. The property taxes and homeowners insurance will increase over time, but for the most part, payment amounts on these types of loans vary little.
During the early amortization period of a fixed-rate loan, a large percentage of your monthly payment goes toward interest, and a significantly smaller percentage toward principal. That reverses itself as the loan ages.
Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. People select these types of loans because 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 stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at a favorable rate. Call Financial Edge Mortgage Corp. at 425-508-9988 for details.
There are many types of Adjustable Rate Mortgages. ARMs are normally adjusted twice a year, based on various indexes.
Most ARM programs have a "cap" that protects you from sudden increases in monthly payments. There may be a cap on interest rate increases 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" which ensures your payment can't go above a fixed amount in a given year. Almost all ARMs also cap your interest rate over the duration of the loan period.
ARMs most often feature the lowest, most attractive rates at the start of the loan. They provide the lower rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is fixed for three or five years. It then adjusts every year. These kinds of loans are fixed for a number of years (3 or 5), then they adjust. Loans like this are often best for people who anticipate moving in three or five years. These types of adjustable rate loans benefit people who will move before the loan adjusts.
Most people who choose ARMs do so because they want to get lower introductory rates and do not plan to stay in the home longer than this introductory 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. It's our job to answer these questions and many others, so we're happy to help!
Do you have a question regarding a mortgage program?