Differences between adjustable and fixed rate loans
With a fixed-rate loan, your payment doesn't change for the life of the mortgage. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but for the most part, payment amounts on fixed rate loans vary little.
During the early amortization period of a fixed-rate loan, most of your monthly payment goes toward interest, and a significantly smaller percentage toward principal. As you pay , more of your payment goes toward principal.
Borrowers might choose a fixed-rate loan to lock in a low interest rate. Borrowers choose these types of loans because interest rates are low and they wish to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call Avalon Mortgage Services, Inc. at (708) 403-5181 to discuss your situation with one of our professionals.
There are many types of Adjustable Rate Mortgages. ARMs are generally adjusted twice a year, based on various indexes.
The majority of ARMs are capped, so they can't go up above a certain amount in a given period. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than a couple percent a year, even though the index the rate is based on increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount the payment can increase in one period. Almost all ARMs also cap your rate over the life of the loan.
ARMs usually start out at a very low rate that may increase as the loan ages. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the introductory 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 best for borrowers who anticipate moving in three or five years. These types of adjustable rate programs are best for people 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 plan on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates if they can't sell their home or refinance at the lower property value.
Have questions about mortgage loans? Call us at (708) 403-5181. It's our job to answer these questions and many others, so we're happy to help!