Fixed versus adjustable loans
A fixed-rate loan features a fixed payment amount over the life of your mortgage. The property taxes and homeowners insurance will increase over time, but generally, payments on fixed rate loans vary little.
Early in a fixed-rate loan, most of your monthly payment goes toward interest, and a much smaller part toward principal. As you pay , more of your payment goes toward principal.
Borrowers might choose a fixed-rate loan in order to lock in a low rate. Borrowers select fixed-rate 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 with a fixed-rate loan can provide greater 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 a favorable rate. Call Absolute Mortgage, a Division of Finance of America Mortgage, LLC at 253-848-1255 for details.
There are many different types of Adjustable Rate Mortgages. ARMs are generally adjusted twice a year, based on various indexes.
The majority of ARMs are capped, which means they won't increase above a specific amount in a given period. Some ARMs won't adjust more than two percent 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 the payment can go up in one period. Almost all ARMs also cap your rate over the duration of the loan.
ARMs most often feature the lowest, most attractive rates toward the start. They usually guarantee the lower rate from a month to ten years. You've likely read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then adjust. These loans are often best for people who anticipate moving within three or five years. These types of adjustable rate loans are best for borrowers who will move before the initial lock expires.
You might choose an Adjustable Rate Mortgage to get a lower initial rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates if they can't sell or refinance with a lower property value.
Have questions about mortgage loans? Call us at 253-848-1255. It's our job to answer these questions and many others, so we're happy to help!