Fixed versus adjustable rate loans
A fixed-rate loan features a fixed payment for the entire duration of the mortgage. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally monthly payments for your fixed-rate loan will increase very little.
At the beginning of a a fixed-rate mortgage loan, the majority the payment goes toward interest. The amount paid toward principal goes up gradually every month.
You might choose a fixed-rate loan to lock in a low rate. People choose these types of loans because interest rates are low and they wish to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at the best rate currently available. Call Power Purchase Mortgage at (877) 226-8191 to learn more.
Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs usually adjust twice a year, based on various indexes.
Most programs feature a cap that protects borrowers from sudden increases in monthly payments. There may be a cap on how much your interest rate can go up in one period. For example: no more than a couple percent a year, even though the index the rate is based on increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount the payment can go up in one period. In addition, the great majority of adjustable programs feature a "lifetime cap" — this cap means that your interest rate will never go over the capped percentage.
ARMs most often have their lowest, most attractive rates at the start of the loan. They usually provide the lower interest rate for an initial period that varies greatly. You've likely read about 5/1 or 3/1 ARMs. For these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These kinds of loans are fixed for a number of years (3 or 5), then adjust after the initial period. Loans like this are usually best for people who anticipate moving within three or five years. These types of adjustable rate loans benefit people who will move before the loan adjusts.
You might choose an Adjustable Rate Mortgage to get a lower introductory interest rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up if they cannot sell their home or refinance at the lower property value.
Have questions about mortgage loans? Call us at (877) 226-8191. It's our job to answer these questions and many others, so we're happy to help!