Differences between adjustable and fixed rate loans
With a fixed-rate loan, your payment stays the same for the entire duration of your mortgage. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part monthly payments on your fixed-rate loan will be very stable.
Your first few years of payments on a fixed-rate loan go mostly toward interest. As you pay on the loan, more of your payment goes toward principal.
You can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose fixed-rate loans when interest rates are low and they want to lock in at the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call Washingtonian Mortgage, LLC at 410-451-2755 for details.
There are many types of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.
Most programs feature a cap that protects you from sudden monthly payment increases. There may be a cap on how much your interest rate can increase in one period. For example: no more than two percent a year, even if the underlying index increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount the payment can increase in a given period. Most ARMs also cap your interest rate over the duration of the loan period.
ARMs most often feature the lowest rates toward the beginning of the loan. They guarantee that rate from a month to ten years. You've likely heard of 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 types of loans are fixed for a number of years (3 or 5), then they adjust after the initial period. Loans like this are usually best for borrowers who expect to move in three or five years. These types of adjustable rate programs are best for borrowers who will move before the initial lock expires.
Most people who choose ARMs do so because they want to take advantage of lower introductory rates and don't plan to remain in the house longer than the introductory low-rate period. ARMs can be risky when property values go down and borrowers are unable to sell their home or refinance their loan.
Have questions about mortgage loans? Call us at 410-451-2755. We answer questions about different types of loans every day.