Differences between fixed and adjustable loans
With a fixed-rate loan, your payment remains the same for the life of your loan. The portion allocated to principal (the loan amount) increases, however, the amount you pay in interest will go down in the same amount. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part monthly payments on your fixed-rate loan will be very stable.
Your first few years of payments on a fixed-rate loan go mostly to pay interest. The amount paid toward principal goes up slowly every month.
You can choose a fixed-rate loan to lock in a low rate. People select these types of loans when interest rates are low and they wish to lock in at this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at a good rate. Call Power Purchase Mortgage at (800)593-0143 to learn more.
Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. ARMs usually adjust every six months, based on various indexes.
Most Adjustable Rate Mortgages feature this cap, which means they won't go up over a specific amount in a given period. Some ARMs won'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. Almost all ARMs also cap your rate over the life of the loan period.
ARMs usually start out at a very low rate that may increase over time. 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 number of years (3 or 5), then adjust after the initial period. Loans like this are often best for borrowers who expect to move in three or five years. These types of adjustable rate programs are best for people who will sell their house or refinance before the loan adjusts.
Most people who choose ARMs do so when they want to get lower introductory rates and don't plan on remaining in the home for any longer than this initial low-rate period. ARMs can be risky if property values decrease and borrowers can't sell their home or refinance.
Have questions about mortgage loans? Call us at (800)593-0143. It's our job to answer these questions and many others, so we're happy to help!