Adjustable versus fixed loans
With a fixed-rate loan, your monthly payment never changes for the life of the mortgage. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance will increase over time, but in general, payment amounts on fixed rate loans change little over the life of the loan.
Early in a fixed-rate loan, a large percentage of your payment pays interest, and a significantly smaller percentage toward principal. The amount paid toward principal goes up slowly each month.
Borrowers can choose a fixed-rate loan to lock in a low rate. Borrowers choose these types of loans because interest rates are low and they wish to lock in this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at a favorable rate. Call Power Purchase Mortgage at (877) 226-8191 for details.
There are many types of Adjustable Rate Mortgages. ARMs are generally adjusted every six months, based on various indexes.
Most Adjustable Rate Mortgages are capped, so they can't go up above a specific amount in a given period of time. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than a couple percent per year, even if the index the rate is based on goes up by more than two percent. Sometimes an ARM features a "payment cap" that guarantees that your payment can't go above a fixed amount over the course of a given year. Most ARMs also cap your interest rate over the life of the loan.
ARMs most often have their lowest rates at the start of the loan. They provide the lower interest rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set for three or five years. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust. Loans like this are often best for borrowers who expect to move in three or five years. These types of adjustable rate loans benefit borrowers who plan to move before the initial lock expires.
Most people who choose ARMs do so because they want to get lower introductory rates and don't plan on remaining in the home for any longer than the introductory low-rate period. ARMs can be risky when property values decrease and borrowers are unable to sell or refinance.
Have questions about mortgage loans? Call us at (877) 226-8191. We answer questions about different types of loans every day.