Differences between fixed and adjustable loans
With a fixed-rate loan, your monthly payment doesn't change for the life of your mortgage. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but for the most part, payment amounts on fixed rate loans vary little.
Early in a fixed-rate loan, most of your payment pays interest, and a significantly smaller percentage toward principal. This proportion gradually reverses itself as the loan ages.
You can choose a fixed-rate loan to lock in a low rate. Borrowers choose fixed-rate loans when interest rates are low and they wish to lock in at the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at the best rate currently available. Call VSI Home Lending at (260) 338-2561 to discuss your situation with one of our professionals.
There are many types of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.
Most ARMs feature this cap, which means they won't go up above a specified amount in a given period. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than two percent per year, even though the index the rate is based on increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount that your payment can go up in one period. The majority of ARMs also cap your interest rate over the duration of the loan.
ARMs usually start out at a very low rate that may increase 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 adjust after the initial period. Loans like this are often best for people who expect to move within three or five years. These types of adjustable rate loans most benefit people who will move before the initial lock expires.
Most borrowers who choose ARMs choose them when they want to get lower introductory rates and do not plan to stay in the house longer than this introductory low-rate period. ARMs can be risky in a down market because homeowners could be stuck with rates that go up when they can't sell their home or refinance with a lower property value.
Have questions about mortgage loans? Call us at (260) 338-2561. It's our job to answer these questions and many others, so we're happy to help!