Differences between fixed and adjustable rate loans
A fixed-rate loan features the same payment over the life of your mortgage. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but in general, payments on fixed rate loans change little over the life of the loan.
During the early amortization period of a fixed-rate loan, most of your payment goes toward interest, and a much smaller part toward principal. The amount paid toward principal increases up slowly every month.
You might choose a fixed-rate loan to lock in a low interest rate. Borrowers choose fixed-rate loans when interest rates are low and they want to lock in the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at a favorable rate. Call National Asset Mortgage, LLC at (855) 391-3290 for details.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. ARMs are normally adjusted twice a year, based on various indexes.
Most ARM programs have a "cap" that protects borrowers from sudden monthly payment increases. There may be a cap on interest rate increases over the course of a year. For example: no more than a couple percent a year, even though the index the rate is based on goes up by more than two percent. Sometimes an ARM has a "payment cap" that ensures that your payment will not increase beyond a certain amount in a given year. Almost all ARMs also cap your interest rate over the life of the loan period.
ARMs most often have their lowest rates toward the start. They usually provide the lower interest rate for an initial period that varies greatly. You've probably read about 5/1 or 3/1 ARMs. In these loans, the introductory 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 they adjust. Loans like this are best for people who expect to move within three or five years. These types of adjustable rate programs most benefit people who plan to sell their house or refinance before the loan adjusts.
Most people who choose ARMs choose them because they want to get lower introductory rates and don't plan to stay in the house for any longer than this introductory low-rate period. ARMs are risky when property values go down and borrowers can't 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.