Differences between fixed and adjustable loans
With a fixed-rate loan, your payment doesn't change for the entire duration of your loan. The portion allocated for principal (the amount you borrowed) will increase, but your interest payment will go down accordingly. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but for the most part, payments on fixed rate loans change little over the life of the loan.
Your first few years of payments on a fixed-rate loan are applied primarily toward interest. As you pay on the loan, more of your payment goes toward principal.
Borrowers might choose a fixed-rate loan to lock in a low interest rate. Borrowers select fixed-rate loans when interest rates are low and they want to lock in this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call America's Money Source at 4078987559 to discuss your situation with one of our professionals.
There are many different kinds of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.
Most Adjustable Rate Mortgages feature this cap, so they won't increase over a specified amount in a given period of time. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that ensures your payment will not increase beyond a certain amount in a given year. The majority of ARMs also cap your rate over the life of the loan period.
ARMs usually start at a very low rate that may increase over time. You've probably read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then adjust. These loans are often best for borrowers who anticipate moving within three or five years. These types of adjustable rate programs most benefit people who plan to move before the loan adjusts.
Most people who choose ARMs do so because they want to get lower introductory rates and do not plan on remaining in the house for any longer than the introductory low-rate period. ARMs can be risky when housing prices go down because homeowners can get 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 4078987559. We answer questions about different types of loans every day.