Fixed versus adjustable rate loans
A fixed-rate loan features the same payment for the entire duration of your mortgage. The property tax and homeowners insurance will increase over time, but for the most part, payment amounts on fixed rate loans vary little.
When you first take out a fixed-rate mortgage loan, most of your payment goes toward interest. This proportion gradually reverses as the loan ages.
You can choose a fixed-rate loan to lock in a low interest rate. Borrowers select fixed-rate loans because interest rates are low and they wish to lock in at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at a good rate. Call Avalon Mortgage Services, Inc. an Illinois Residential Mortgage Licensee at 7084035181 to learn more.
Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. ARMs usually adjust twice a year, based on various indexes.
Most Adjustable Rate Mortgages are capped, which means they can't increase over a specific amount in a given period. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than a couple percent per year, even though the underlying index increases by more than two percent. Sometimes an ARM has a "payment cap" which guarantees your payment can't go above a certain amount over the course of a given year. The majority of ARMs also cap your rate over the life of the loan period.
ARMs usually start out at a very low rate that may increase as the loan ages. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These kinds of loans are fixed for a number of years (3 or 5), then adjust after the initial period. These loans are often best for borrowers who anticipate moving within three or five years. These types of adjustable rate loans are best for people who plan to sell their house or refinance before the initial lock expires.
Most people who choose ARMs choose them because they want to get lower introductory rates and do not plan to remain in the house for any longer than the initial low-rate period. ARMs can be risky in a down market because homeowners could be stuck with increasing rates if they cannot sell their home or refinance with a lower property value.
Have questions about mortgage loans? Call us at 7084035181. We answer questions about different types of loans every day.