Adjustable versus fixed rate loans
With a fixed-rate loan, your payment doesn't change for the entire duration of the mortgage. The amount allocated to your principal (the amount you borrowed) increases, however, your interest payment will decrease accordingly. The property tax and homeowners insurance will go up over time, but in general, payments on these types of loans vary little.
Early in a fixed-rate loan, most of your monthly payment goes toward interest, and a significantly smaller part toward principal. The amount paid toward your principal amount increases up gradually each month.
Borrowers can choose a fixed-rate loan in order to lock in a low rate. Borrowers choose these types of loans because interest rates are low and they wish to lock in this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at the best rate currently available. Call Cottingham Mortgage Inc. at (800) 288-9693 to learn more.
There are many different types of Adjustable Rate Mortgages. ARMs are generally adjusted twice a year, based on various indexes.
Most Adjustable Rate Mortgages are capped, which means they won't go up above a certain amount in a given period of time. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than a couple percent a year, even if the index the rate is based on goes up by more than two percent. Sometimes an ARM features a "payment cap" that guarantees that your payment will not increase beyond a fixed amount in a given year. Most ARMs also cap your interest rate over the duration of the loan period.
ARMs most often feature their lowest, most attractive rates at the start. They usually guarantee that interest rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are often best for borrowers who expect to move in three or five years. These types of adjustable rate loans most benefit people who will sell their house or refinance before the loan adjusts.
You might choose an Adjustable Rate Mortgage to get a lower introductory interest rate and plan on moving, refinancing or absorbing the higher rate after the initial rate goes up. 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) 288-9693. It's our job to answer these questions and many others, so we're happy to help!