Differences between adjustable and fixed rate loans
With a fixed-rate loan, your monthly payment never changes for the life of the mortgage. The longer you pay, the more of your payment goes toward principal. 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 be very stable.
At the beginning of a a fixed-rate loan, most of the payment is applied to interest. As you pay on the loan, more of your payment goes toward principal.
You can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose fixed-rate loans when interest rates are low and they want to lock in at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide more stability 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 a favorable rate. Call Power Purchase Mortgage at (800)593-0143 to discuss how we can help.
There are many different types of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.
Most ARMs are capped, so they can't increase above a specified amount in a given period of time. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than two percent per year, even though the underlying index goes up by more than two percent. Sometimes an ARM features a "payment cap" that guarantees your payment won't go above a certain amount over the course of a given year. Most ARMs also cap your interest rate over the duration of the loan.
ARMs usually start out at a very low rate that may increase as the loan ages. You've probably read about 5/1 or 3/1 ARMs. For these loans, the initial 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 they adjust. These loans are usually best for borrowers who expect to move in three or five years. These types of adjustable rate loans are best for borrowers who plan to sell their house or refinance before the loan adjusts.
You might choose an ARM to get a very low initial interest rate and count on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky when property values go down and borrowers can't 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.