Differences between adjustable and fixed rate loans
A fixed-rate loan features a fixed payment over the life of the loan. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part payment amounts on your fixed-rate loan will increase very little.
Early in a fixed-rate loan, most of your payment pays interest, and a much smaller percentage goes to principal. The amount paid toward principal goes up slowly every month.
Borrowers might choose a fixed-rate loan to lock in a low rate. Borrowers select fixed-rate loans when interest rates are low and they want to lock in the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at the best rate currently available. Call Trustin Mortgage, LLC at (302) 765-8089 to learn more.
Adjustable Rate Mortgages — ARMs, come in many varieties. ARMs usually adjust twice a year, based on various indexes.
Most ARM programs feature a "cap" that protects borrowers from sudden monthly payment increases. Some ARMs can't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which guarantees your payment won't increase beyond a fixed amount in a given year. Most ARMs also cap your rate over the life of the loan period.
ARMs most often have their lowest, most attractive rates toward the start. They usually provide that rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is fixed 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 best for borrowers who anticipate moving in three or five years. These types of ARMs are best for borrowers who plan to move before the loan adjusts.
Most people who choose ARMs do so when they want to get lower introductory rates and do not plan on remaining in the house for any longer than the introductory low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates when they can't sell or refinance at the lower property value.
Have questions about mortgage loans? Call us at (302) 765-8089. We answer questions about different types of loans every day.
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