Differences between fixed and adjustable rate loans
With a fixed-rate loan, your monthly payment never changes for the life of your mortgage. The amount of the payment that goes to principal (the loan amount) will go up, but the amount you pay in interest will go down in the same amount. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part monthly payments for a fixed-rate loan will increase very little.
When you first take out a fixed-rate loan, the majority the payment goes toward interest. The amount paid toward principal goes up gradually every month.
You can choose a fixed-rate loan in order to lock in a low interest rate. People select these types of loans when interest rates are low and they want to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at the best rate currently available. Call America's Money Source at 4078987559 for details.
Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. ARMs usually adjust twice a year, based on various indexes.
Most programs have a cap that protects you from sudden increases in monthly payments. Some ARMs can't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that guarantees your payment can't increase beyond a fixed amount over the course of a given year. In addition, the great majority of ARM programs have a "lifetime cap" — this cap means that the rate will never exceed the cap percentage.
ARMs usually start at a very low rate that may increase over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is fixed for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are best for people who anticipate moving in three or five years. These types of adjustable rate programs are best for borrowers who will move before the loan adjusts.
You might choose an Adjustable Rate Mortgage to get a very low introductory rate and plan on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs can be risky in a down market because homeowners can get stuck with rates that go up when they cannot sell their home or refinance at the lower property value.
Have questions about mortgage loans? Call us at 4078987559. It's our job to answer these questions and many others, so we're happy to help!