Adjustable versus fixed loans
With a fixed-rate loan, your monthly payment never changes for the life of the loan. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance will go up over time, but generally, payment amounts on these types of loans don't increase much.
During the early amortization period of a fixed-rate loan, most of your monthly payment pays interest, and a significantly smaller percentage goes to principal. The amount paid toward your principal amount increases up gradually each month.
You might 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 at this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at the best rate currently available. Call Metro Mortgage at 866-300-1550 for details.
Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. ARMs usually adjust every six months, based on various indexes.
The majority of ARMs feature this cap, so they won't go up over a certain amount in a given period of time. 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 though the index the rate is based on increases by more than two percent. Sometimes an ARM has a "payment cap" that guarantees your payment can't go above a fixed amount over the course of a given year. In addition, the great majority of ARMs have a "lifetime cap" — this means that your rate can't ever go over the cap percentage.
ARMs most often feature the lowest, most attractive rates toward the beginning of the loan. They provide that rate from a month to ten years. You may have heard about "3/1 ARMs" or "5/1 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 they adjust. These loans are best for people who anticipate moving in three or five years. These types of ARMs are best for borrowers who will sell their house or refinance before the loan adjusts.
You might choose an Adjustable Rate Mortgage to get a lower introductory interest rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs are risky when property values go down and borrowers cannot sell or refinance their loan.
Have questions about mortgage loans? Call us at 866-300-1550. It's our job to answer these questions and many others, so we're happy to help!