Fixed versus adjustable loans
A fixed-rate loan features the same payment amount for the entire duration of the loan. The property taxes and homeowners insurance will go up over time, but in general, payments on these types of loans change little over the life of the loan.
Your first few years of payments on a fixed-rate loan are applied mostly to pay interest. As you pay , more of your payment is applied to principal.
Borrowers can choose a fixed-rate loan in order to lock in a low rate. People select fixed-rate loans when interest rates are low and they wish to lock in this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more consistency in monthly payments. 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 Washingtonian Mortgage, LLC at 410-451-2755 for details.
There are many different kinds of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.
The majority of Adjustable Rate Mortgages are capped, which means they can't go up above a specified amount in a given period. There may be a cap on interest rate increases over the course of a year. For example: no more than two percent a year, even if the underlying index increases by more than two percent. Sometimes an ARM has a "payment cap" which guarantees that your payment can't increase beyond a certain amount over the course of a given year. Most ARMs also cap your interest rate over the duration of the loan period.
ARMs usually start out at a very low rate that usually increases as the loan ages. You've likely read about 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are usually best for borrowers who anticipate moving within three or five years. These types of ARMs are best for people who plan to sell their house or refinance before the loan adjusts.
Most borrowers who choose ARMs do so when they want to take advantage of lower introductory rates and do not plan on staying 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 rates that go up if they cannot sell or refinance with a lower property value.
Have questions about mortgage loans? Call us at 410-451-2755. We answer questions about different types of loans every day.