Differences between adjustable and fixed loans
A fixed-rate loan features the same payment for the entire duration of the mortgage. The property tax and homeowners insurance will go up over time, but for the most part, payment amounts on fixed rate loans vary little.
At the beginning of a a fixed-rate loan, the majority your payment goes toward interest. That reverses as the loan ages.
Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. People choose fixed-rate loans when interest rates are low and they wish to lock in at this lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at a favorable rate. Call Trustin Mortgage, LLC at (302) 765-8089 for details.
There are many different types of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.
The majority of ARMs are capped, so they won't go up over a specified amount in a given period. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which ensures your payment won't go above a fixed amount in a given year. Almost all ARMs also cap your interest rate over the duration of the loan period.
ARMs usually start out at a very low rate that may increase as the loan ages. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These loans are fixed for a certain number of years (3 or 5), then they adjust. These loans are best for borrowers who anticipate moving within three or five years. These types of adjustable rate programs most benefit borrowers who plan to move before the initial lock expires.
You might choose an Adjustable Rate Mortgage to take advantage of a lower introductory rate and count on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates when they can't sell their home or refinance at the lower property value.
Have questions about mortgage loans? Call us at (302) 765-8089. It's our job to answer these questions and many others, so we're happy to help!
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