Adjustable versus fixed rate loans
With a fixed-rate loan, your payment doesn't change for the entire duration of the loan. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but for the most part, payment amounts on fixed rate loans vary little.
Your first few years of payments on a fixed-rate loan are applied primarily to pay interest. That gradually reverses as the loan ages.
Borrowers might choose a fixed-rate loan in order to lock in a low rate. People select these types of loans when interest rates are low and they want to lock in 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 can help you lock in a fixed-rate at the best rate currently available. Call Am1st Financial at 248-499-9901 for details.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. ARMs are normally adjusted every six months, based on various indexes.
Most ARMs feature this cap, so they can't go up over a specified amount in a given period. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than a couple percent per year, even though the underlying index 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 your monthly payment can go up in a given period. Almost all ARMs also cap your rate over the life of the loan period.
ARMs most often have the lowest, most attractive rates at the start of the loan. They usually provide that rate from a month to ten years. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust. These loans are usually best for people who anticipate moving in three or five years. These types of adjustable rate programs most benefit borrowers who plan to sell their house or refinance before the initial lock expires.
Most people who choose ARMs do so when they want to take advantage of lower introductory rates and don't plan on staying in the home for any longer than this introductory low-rate period. ARMs can be risky when property values go down and borrowers cannot sell their home or refinance their loan.
Have questions about mortgage loans? Call us at 248-499-9901. It's our job to answer these questions and many others, so we're happy to help!