Differences between adjustable and fixed loans
A fixed-rate loan features a fixed payment for the entire duration of your mortgage. The property taxes and homeowners insurance will increase over time, but generally, payments on these types of loans don't increase much.
Your first few years of payments on a fixed-rate loan are applied primarily to pay interest. This proportion gradually reverses as the loan ages.
You might choose a fixed-rate loan to lock in a low interest rate. People choose fixed-rate loans because interest rates are low and they want to lock in this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater stability in monthly payments. 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 how we can help.
There are many different kinds of Adjustable Rate Mortgages. ARMs are normally adjusted twice a year, based on various indexes.
Most Adjustable Rate Mortgages feature this cap, so they won't go up over a specific amount in a given period of time. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which ensures that your payment won't increase beyond a certain amount in a given year. Additionally, the great majority of ARM programs have a "lifetime cap" — this means that your rate can't exceed the capped amount.
ARMs most often feature their lowest, most attractive rates toward the start. They provide that interest rate from a month to ten years. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are best for people who anticipate moving in three or five years. These types of adjustable rate programs benefit people who will sell their house or refinance before the loan adjusts.
You might choose an ARM to get a lower initial rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs are risky when property values go down and borrowers are unable to sell or refinance.
Have questions about mortgage loans? Call us at (800)593-0143. We answer questions about different types of loans every day.