Differences between fixed and adjustable loans
A fixed-rate loan features the same payment for the entire duration of the loan. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part payment amounts on a fixed-rate loan will increase very little.
Early in a fixed-rate loan, a large percentage of your monthly payment goes toward interest, and a much smaller part toward principal. As you pay on the loan, more of your payment is applied to principal.
You might choose a fixed-rate loan to lock in a low rate. People select these types of loans because interest rates are low and they want to lock in at this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at a favorable rate. Call VSI Home Lending at 2603382561 for details.
There are many kinds 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 go up over a certain amount in a given period. There may be a cap on interest rate variances over the course of a year. For example: no more than two percent per year, even if the index the rate is based on increases by more than two percent. Sometimes an ARM has a "payment cap" which ensures your payment can't increase beyond a fixed amount over the course of a given year. Plus, the great majority of ARMs feature a "lifetime cap" — this cap means that the interest rate won't exceed 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 set for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then adjust. Loans like this are often best for borrowers who anticipate moving within three or five years. These types of adjustable rate loans benefit people who will sell their house or refinance before the loan adjusts.
You might choose an Adjustable Rate Mortgage to take advantage of a lower initial interest rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky when property values go down and borrowers can't sell or refinance their loan.
Have questions about mortgage loans? Call us at 2603382561. We answer questions about different types of loans every day.