Adjustable versus fixed loans
With a fixed-rate loan, your payment stays the same for the entire duration of the loan. The portion that goes for principal (the amount you borrowed) will go up, but your interest payment will go down accordingly. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally payment amounts on your fixed-rate mortgage will increase very little.
During the early amortization period of a fixed-rate loan, a large percentage of your monthly payment goes toward interest, and a significantly smaller part toward principal. As you pay on the loan, more of your payment is applied to principal.
You can choose a fixed-rate loan to lock in a low rate. Borrowers choose fixed-rate loans because interest rates are low and they wish to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at a favorable rate. Call Executive Lending Group, LLC at 8165258000 to learn more.
Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. ARMs usually adjust twice a year, based on various indexes.
The majority of ARMs feature this cap, so they can't increase above a specified amount in a given period of time. There may be a cap on interest rate increases over the course of a year. For example: no more than two percent per 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 directly, caps the amount that the payment can increase in one period. The majority of ARMs also cap your rate over the duration of the loan.
ARMs usually start at a very low rate that usually increases over time. You've probably read about 5/1 or 3/1 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 number of years (3 or 5), then they adjust. These loans are usually best for borrowers who expect to move within three or five years. These types of adjustable rate loans 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 don't plan to remain in the house longer than this introductory low-rate period. ARMs are risky when property values go down and borrowers can't sell or refinance.
Have questions about mortgage loans? Call us at 8165258000. It's our job to answer these questions and many others, so we're happy to help!