Fixed versus adjustable loans
With a fixed-rate loan, your payment remains the same for the entire duration of the mortgage. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance will go up over time, but for the most part, payments on these types of loans vary little.
Your first few years of payments on a fixed-rate loan go primarily toward interest. That gradually reverses itself as the loan ages.
Borrowers can choose a fixed-rate loan in order to lock in a low rate. People select fixed-rate loans because interest rates are low and they wish to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at a good rate. Call Absolute Mortgage, a Division of Finance of America Mortgage, LLC at 253-848-1255 to discuss how we can help.
Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs usually adjust twice a year, based on various indexes.
The majority of ARMs are capped, which means they won't increase over a specified amount in a given period. Some ARMs won't increase 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 that your payment can go up in a given period. Plus, the great majority of ARM programs feature a "lifetime cap" — this means that the interest rate can't go over the capped amount.
ARMs usually start out at a very low rate that usually increases as the loan ages. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the initial rate is set for three or five years. After this period it adjusts every year. These types of loans are fixed for a number of years (3 or 5), then they adjust. Loans like this are best for people who anticipate moving in three or five years. These types of adjustable rate programs most benefit borrowers who will sell their house or refinance before the initial lock expires.
You might choose an ARM to take advantage of a very low introductory rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs are risky if property values go down and borrowers can't sell or refinance their loan.
Have questions about mortgage loans? Call us at 253-848-1255. We answer questions about different types of loans every day.