Fixed versus adjustable loans
A fixed-rate loan features a fixed payment for the entire duration of the mortgage. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but in general, payment amounts on fixed rate loans vary little.
Your first few years of payments on a fixed-rate loan go primarily to pay interest. The amount applied to principal goes up slowly each month.
You might choose a fixed-rate loan in order to lock in a low interest rate. People select these types of loans because interest rates are low and they want to lock in the lower rate. For homeowners who have an ARM now, refinancing with 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 Washingtonian Mortgage, LLC at 4433365525 for details.
There are many different kinds of Adjustable Rate Mortgages. ARMs are normally adjusted every six months, based on various indexes.
Most ARM programs feature a cap that protects you from sudden monthly payment increases. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than two percent per year, even though the underlying index increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount the monthly payment can increase in a given period. In addition, the great majority of adjustable programs feature a "lifetime cap" — the rate can't ever go over the cap amount.
ARMs most often feature their lowest, most attractive rates toward the start. They usually guarantee that rate from a month to ten years. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the initial rate is set for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are often best for borrowers who expect to move in three or five years. These types of adjustable rate loans most benefit borrowers who will move before the loan adjusts.
Most borrowers who choose ARMs choose them when they want to get lower introductory rates and don't plan on remaining in the house longer than this introductory low-rate period. ARMs can be risky if property values go down and borrowers can't sell or refinance.
Have questions about mortgage loans? Call us at 4433365525. It's our job to answer these questions and many others, so we're happy to help!