Fixed versus adjustable loans
With a fixed-rate loan, your monthly payment doesn't change for the entire duration of your mortgage. The portion allocated for your principal (the actual loan amount) will increase, but the amount you pay in interest will decrease accordingly. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part monthly payments on your fixed-rate loan will be very stable.
Early in a fixed-rate loan, most of your monthly payment pays interest, and a much smaller percentage toward principal. This proportion reverses itself as the loan ages.
You might choose a fixed-rate loan in order to lock in a low rate. Borrowers choose these types of loans when interest rates are low and they want to lock in at the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at a good rate. Call America's Money Source at 4078987559 for details.
There are many types of Adjustable Rate Mortgages. ARMs are normally adjusted twice a year, based on various indexes.
Most Adjustable Rate Mortgages feature this cap, so they won't go up above a certain amount in a given period. There may be a cap on how much your interest rate can increase in one period. For example: no more than two percent per year, even though the underlying index increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount your payment can increase in one period. Plus, almost all ARM programs feature a "lifetime cap" — the rate won't go over the capped percentage.
ARMs usually start out at a very low rate that usually increases as the loan ages. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust. These loans are often best for borrowers who expect to move within three or five years. These types of adjustable rate programs benefit people who will move before the loan adjusts.
You might choose an ARM to take advantage of a lower initial rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs can be risky when property values go down and borrowers cannot sell or refinance.
Have questions about mortgage loans? Call us at 4078987559. We answer questions about different types of loans every day.