Adjustable versus fixed rate loans
With a fixed-rate loan, your payment never changes for the life of your mortgage. The longer you pay, the more of your payment goes toward principal. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part payments on your fixed-rate mortgage will be very stable.
During the early amortization period of a fixed-rate loan, a large percentage of your payment goes toward interest, and a much smaller percentage toward principal. This proportion reverses as the loan ages.
Borrowers can choose a fixed-rate loan in order to lock in a low rate. Borrowers select these types of loans because interest rates are low and they wish to lock in this lower 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'd love to help you lock in a fixed-rate at a good rate. Call National Asset Mortgage, LLC at (855) 391-3290 to learn more.
There are many different types of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.
Most Adjustable Rate Mortgages feature this cap, which means they can't increase above a specified amount in a given period of time. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than two percent a year, even if the index the rate is based on goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount the monthly payment can go up in a given period. Most ARMs also cap your interest rate over the duration of the loan period.
ARMs most often have their lowest, most attractive rates toward the beginning of the loan. They provide that interest rate for an initial period that varies greatly. You've likely heard of 5/1 or 3/1 ARMs. In these loans, the initial rate is fixed for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are best for borrowers who expect to move in three or five years. These types of ARMs most benefit people who plan to move before the initial lock expires.
You might choose an ARM to take advantage of a lower introductory rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs can be risky if property values go down and borrowers cannot sell their home or refinance their loan.
Have questions about mortgage loans? Call us at (855) 391-3290. We answer questions about different types of loans every day.