Differences between adjustable and fixed loans
With a fixed-rate loan, your monthly payment never changes for the life of your mortgage. The portion of the payment allocated for your principal (the loan amount) will increase, however, your interest payment will go down accordingly. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally monthly payments on a fixed-rate loan will increase very little.
Your first few years of payments on a fixed-rate loan are applied mostly toward interest. As you pay , more of your payment is applied to principal.
Borrowers might choose a fixed-rate loan to lock in a low interest rate. Borrowers choose these types of loans because interest rates are low and they wish to lock in this lower rate. If you have an Adjustable Rate Mortgage (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 assist you in locking a fixed-rate at a good rate. Call Power Purchase Mortgage at (800)593-0143 to discuss your situation with one of our professionals.
Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. ARMs are generally adjusted twice a year, based on various indexes.
Most ARM programs have a cap that protects borrowers from sudden increases in monthly payments. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount your monthly payment can increase in a given period. Plus, almost all ARM programs feature a "lifetime cap" — your rate won't go over the cap percentage.
ARMs usually start at a very low rate that usually increases over time. You've likely 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 they adjust after the initial period. Loans like this are usually best for people who expect to move in three or five years. These types of adjustable rate loans are best for people who will sell their house or refinance before the initial lock expires.
Most borrowers who choose ARMs choose them when they want to get lower introductory rates and do not plan to remain in the house longer than the introductory low-rate period. ARMs can be risky when property values decrease and borrowers can't sell their home or refinance their loan.
Have questions about mortgage loans? Call us at (800)593-0143. We answer questions about different types of loans every day.