Differences between adjustable and fixed loans
With a fixed-rate loan, your monthly payment never changes for the life of the loan. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance will go up over time, but generally, payments on these types of loans vary little.
When you first take out a fixed-rate mortgage loan, most of your payment goes toward interest. The amount paid toward your principal amount goes up slowly every month.
Borrowers might choose a fixed-rate loan to lock in a low interest rate. People select fixed-rate loans because interest rates are low and they want to lock in at this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at a favorable rate. Call VSI Home Lending at 2603382561 to discuss how we can help.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. ARMs usually adjust twice a year, based on various indexes.
Most ARM programs have a "cap" that protects borrowers from sudden increases in monthly payments. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount the payment can go up in a given period. In addition, the great majority of ARMs have a "lifetime cap" — the interest rate can't ever go over the capped amount.
ARMs usually start at a very low rate that usually increases over time. You've probably read about 5/1 or 3/1 ARMs. For 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 best for borrowers who expect to move within three or five years. These types of adjustable rate loans are best for people who will sell their house or refinance before the loan adjusts.
You might choose an ARM to take advantage of a lower introductory rate and count on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up if they cannot sell or refinance with a lower property value.
Have questions about mortgage loans? Call us at 2603382561. It's our job to answer these questions and many others, so we're happy to help!