Adjustable versus fixed rate loans
With a fixed-rate loan, your payment stays the same for the entire duration of your loan. The amount allocated to principal (the actual loan amount) will increase, but the amount you pay in interest will decrease in the same amount. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but for the most part, payment amounts on these types of loans don't increase much.
During the early amortization period of a fixed-rate loan, most of your monthly payment goes toward interest, and a much smaller part goes to principal. The amount paid toward principal goes up slowly each month.
You can choose a fixed-rate loan in order to lock in a low rate. Borrowers select these types of loans when interest rates are low and they wish to lock in at this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at the best rate currently available. Call Avalon Mortgage Services, Inc. at (708) 403-5181 to learn more.
Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. ARMs are generally adjusted every six months, based on various indexes.
Most programs have a cap that protects borrowers from sudden increases in monthly payments. There may be a cap on how much your interest rate can go up in one period. For example: no more than two percent a year, even if the index the rate is based on increases by more than two percent. Sometimes an ARM features a "payment cap" that guarantees your payment can't go above a certain amount in a given year. In addition, the great majority of ARM programs feature a "lifetime cap" — this cap means that the rate can't ever go over the capped amount.
ARMs most often feature the lowest rates toward the beginning of the loan. They guarantee the lower interest rate from a month to ten years. You've probably read about 5/1 or 3/1 ARMs. For these loans, the introductory rate is set for three or five years. It then adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are best for borrowers who expect to move within three or five years. These types of adjustable rate programs benefit borrowers who will sell their house or refinance before the loan adjusts.
Most people who choose ARMs choose them because they want to take advantage of lower introductory rates and don't plan on remaining in the house for any longer than the introductory low-rate period. ARMs can be risky when property values go down and borrowers cannot sell or refinance their loan.
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!