Differences between fixed and adjustable rate loans
With a fixed-rate loan, your monthly payment doesn't change for the entire duration of the mortgage. The portion of the payment that goes for your principal (the loan amount) will go up, but the amount you pay in interest will decrease in the same amount. The property tax and homeowners insurance will go up over time, but in general, payment amounts on fixed rate loans vary little.
When you first take out a fixed-rate mortgage loan, most of your payment is applied to interest. As you pay , more of your payment goes toward principal.
Borrowers can choose a fixed-rate loan to lock in a low interest rate. Borrowers choose fixed-rate loans because interest rates are low and they wish to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at a good rate. Call Power Purchase Mortgage at (800)593-0143 for details.
Adjustable Rate Mortgages — ARMs, come in many varieties. ARMs are generally adjusted twice a year, based on various indexes.
The majority of Adjustable Rate Mortgages are capped, which means they won't go up above a specified amount in a given period. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that ensures your payment can't increase beyond a fixed amount in a given year. Additionally, almost all adjustable programs feature a "lifetime cap" — the interest rate can't ever go over the capped percentage.
ARMs usually start out at a very low rate that usually increases as the loan ages. You've likely read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is set 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 often best for people who anticipate moving within three or five years. These types of ARMs are best for people who will sell their house or refinance before the initial lock expires.
Most people who choose ARMs do so when they want to take advantage of lower introductory rates and don't plan to remain in the house for any longer than the initial low-rate period. ARMs can be risky when property values decrease and borrowers can't sell their home or refinance.
Have questions about mortgage loans? Call us at (800)593-0143. It's our job to answer these questions and many others, so we're happy to help!