Differences between fixed and adjustable rate loans
A fixed-rate loan features a fixed payment over the life of the loan. The property taxes and homeowners insurance will increase over time, but for the most part, payment amounts on these types of loans don't increase much.
When you first take out a fixed-rate mortgage loan, the majority the payment is applied to interest. The amount applied to your principal amount goes up slowly every month.
You can choose a fixed-rate loan in order to lock in a low interest rate. People select these types of loans because interest rates are low and they wish to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call Town & Country Home Loans, Inc. at (760)789-9995 to learn more.
There are many different kinds of Adjustable Rate Mortgages. ARMs are normally adjusted twice a year, based on various indexes.
The majority of ARMs feature this cap, which means they can't increase over a specific amount in a given period of time. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount your monthly payment can increase in one period. Most ARMs also cap your interest rate over the duration of the loan period.
ARMs usually start at a very low rate that usually increases over time. 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. Loans like this are usually best for borrowers who anticipate moving in three or five years. These types of adjustable rate programs benefit people who plan to move before the initial lock expires.
You might choose an ARM to get a very low initial interest rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs are risky when property values go down and borrowers can't sell their home or refinance their loan.