Adjustable versus fixed loans
With a fixed-rate loan, your monthly payment doesn't change for the entire duration of your loan. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but in general, payments on fixed rate loans vary little.
Early in a fixed-rate loan, a large percentage of your payment pays interest, and a significantly smaller part toward principal. That gradually reverses as the loan ages.
You might choose a fixed-rate loan to lock in a low interest rate. People select these types of loans when interest rates are low and they wish to lock in the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call Power Purchase Mortgage at (800)593-0143 to learn more.
There are many different kinds of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.
Most ARMs feature this cap, which means they won't go up above a certain amount in a given period of time. Some ARMs can't adjust 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 your monthly payment can increase in a given period. Additionally, the great majority of ARMs have a "lifetime cap" — your rate can't ever go over the capped percentage.
ARMs most often have the lowest rates toward the start of the loan. They provide the lower interest rate for an initial period that varies greatly. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are often best for borrowers who expect to move within three or five years. These types of ARMs most benefit people who plan to move before the loan adjusts.
You might choose an ARM to take advantage of a very low 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 decrease and borrowers are unable to sell their home or refinance.
Have questions about mortgage loans? Call us at (800)593-0143. We answer questions about different types of loans every day.