Fixed versus adjustable rate loans
With a fixed-rate loan, your payment never changes for the entire duration of the loan. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part monthly payments on your fixed-rate mortgage will be very stable.
Early in a fixed-rate loan, most of your monthly payment goes toward interest, and a much smaller percentage goes to principal. As you pay , more of your payment is applied to principal.
Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose these types of loans because interest rates are low and they want to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at a favorable rate. Call VSI Home Lending at (260) 338-2561 to learn more.
Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs are normally adjusted every six months, based on various indexes.
Most Adjustable Rate Mortgages are capped, which means they can't increase over a specified amount in a given period. Some ARMs can'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 directly, caps the amount that your monthly payment can increase in a given period. Plus, the great majority of ARM programs have a "lifetime cap" — your rate can't ever go over the capped amount.
ARMs usually start at a very low rate that usually increases over time. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for a certain number of years (3 or 5), then they adjust. These loans are best for borrowers who expect to move within three or five years. These types of adjustable rate loans most benefit borrowers who will move before the initial lock expires.
Most people who choose ARMs choose them when they want to take advantage of lower introductory rates and do not plan to remain in the home longer than the initial low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up if they can't sell or refinance with a lower property value.
Have questions about mortgage loans? Call us at (260) 338-2561. We answer questions about different types of loans every day.