Differences between adjustable and fixed loans
A fixed-rate loan features a fixed payment amount for the entire duration of your loan. The property taxes and homeowners insurance will increase over time, but for the most part, payments on these types of loans don't increase much.
Your first few years of payments on a fixed-rate loan go mostly to pay interest. As you pay on the loan, more of your payment goes toward principal.
You might choose a fixed-rate loan in order to lock in a low rate. Borrowers choose fixed-rate loans because interest rates are low and they wish to lock in this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call VSI Home Lending at 2603382561 for details.
There are many types of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.
Most ARMs are capped, so they can't go up over a specified amount in a given period. There may be a cap on how much your interest rate can increase in one period. For example: no more than a couple percent per year, even though the index the rate is based on increases by more than two percent. Sometimes an ARM has a "payment cap" that ensures your payment will not go above a certain amount in a given year. Plus, almost all ARM programs have a "lifetime cap" — this cap means that your interest rate can't ever go over the cap percentage.
ARMs usually start at a very low rate that may increase over time. You've likely read about 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then adjust. These loans are often best for borrowers who expect to move in three or five years. These types of ARMs most benefit borrowers who will sell their house or refinance before the loan adjusts.
You might choose an ARM to take advantage of a lower initial rate and plan on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs can be risky when housing prices go down because homeowners can get 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. We answer questions about different types of loans every day.