Differences between fixed and adjustable rate loans
With a fixed-rate loan, your payment remains the same for the entire duration of your mortgage. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance will increase over time, but generally, payment amounts on these types of loans vary little.
At the beginning of a a fixed-rate mortgage loan, most of the payment is applied to interest. The amount applied to your principal amount increases up gradually each month.
Borrowers might choose a fixed-rate loan to lock in a low interest rate. Borrowers select fixed-rate loans when interest rates are low and they want to lock in at this low rate. For homeowners who have an 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'd love 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.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. ARMs usually adjust twice a year, based on various indexes.
Most programs feature a cap that protects borrowers from sudden monthly payment increases. Some ARMs can't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that guarantees that your payment will not go above a fixed amount in a given year. In addition, almost all ARM programs feature a "lifetime cap" — your interest rate can't exceed the capped percentage.
ARMs most often feature their lowest rates toward the start of the loan. They guarantee the lower rate for an initial period that varies greatly. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the initial rate is set for three or five years. It then adjusts every year. These loans are fixed for a certain number of years (3 or 5), then they adjust. These loans are usually best for borrowers who anticipate moving within three or five years. These types of ARMs most benefit borrowers who plan to move before the loan adjusts.
Most people who choose ARMs do so because they want to get lower introductory rates and do not plan to remain in the house longer than the introductory low-rate period. ARMs are risky if property values decrease and borrowers can't sell or refinance.
Have questions about mortgage loans? Call us at (800)593-0143. We answer questions about different types of loans every day.