Differences between adjustable and fixed rate loans
With a fixed-rate loan, your payment remains the same for the life of your loan. The portion of the payment allocated for your principal (the actual loan amount) will increase, however, your interest payment will decrease accordingly. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally payments on a fixed-rate mortgage will increase very little.
Early in a fixed-rate loan, a large percentage of your monthly payment pays interest, and a significantly smaller percentage toward principal. The amount paid toward your principal amount increases up slowly each month.
Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose these types of loans when interest rates are low and they want to lock in at 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 can assist you in locking a fixed-rate at the best rate currently available. Call Equity Edge Mortgage, Inc. at 719-425-2226 to learn more.
Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. ARMs usually adjust twice a year, based on various indexes.
Most ARM programs feature a cap that protects you from sudden monthly payment increases. Some ARMs can't increase more than 2% per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount the payment can increase in a given period. The majority of ARMs also cap your interest rate over the duration of the loan.
ARMs most often feature the lowest, most attractive rates toward the beginning of the loan. They guarantee the lower interest rate from a month to ten years. You've likely read about 5/1 or 3/1 ARMs. In these loans, the initial rate is fixed for three or five years. It then adjusts every year. These loans are fixed for a certain number of years (3 or 5), then adjust after the initial period. These loans are best for borrowers who expect to move within three or five years. These types of ARMs benefit borrowers who plan to sell their house or refinance before the loan adjusts.
You might choose an Adjustable Rate Mortgage to get a lower initial interest rate and plan on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up when they can't sell or refinance at the lower property value.
Have questions about mortgage loans? Call us at 719-425-2226. It's our job to answer these questions and many others, so we're happy to help!