Fixed versus adjustable rate loans
A fixed-rate loan features the same payment for the entire duration of the loan. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part payment amounts for your fixed-rate mortgage will be very stable.
Early in a fixed-rate loan, a large percentage of your monthly payment goes toward interest, and a significantly smaller percentage goes to principal. As you pay , more of your payment goes toward principal.
Borrowers can choose a fixed-rate loan in order to lock in a low rate. Borrowers choose 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 with a fixed-rate loan can offer greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at a favorable rate. Call Washingtonian Mortgage, LLC at 410-451-2755 for details.
Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. ARMs usually adjust every six months, based on various indexes.
Most ARMs feature this cap, so they can't increase above a specified amount in a given period. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that guarantees your payment won't go above a fixed amount in a given year. Additionally, almost all adjustable programs feature a "lifetime cap" — the interest rate can never go over the cap amount.
ARMs usually start out at a very low rate that may increase as the loan ages. You've probably heard of 5/1 or 3/1 ARMs. For these loans, the introductory rate is fixed 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 they adjust. Loans like this are best for people who expect to move within three or five years. These types of adjustable rate programs most benefit people who will sell their house or refinance before the loan adjusts.
Most borrowers who choose ARMs choose them when they want to take advantage of lower introductory rates and don't plan on remaining in the house for any longer than this introductory low-rate period. ARMs are risky when property values go down and borrowers can't sell or refinance their loan.
Have questions about mortgage loans? Call us at 410-451-2755. It's our job to answer these questions and many others, so we're happy to help!