Differences between fixed and adjustable rate loans
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A fixed-rate loan features the same payment for the entire duration of the loan. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally payment amounts for a fixed-rate mortgage will increase very little.
At the beginning of a a fixed-rate loan, the majority your payment is applied to interest. This proportion gradually reverses itself as the loan ages.
You can 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 at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at the best rate currently available. Call The Mortgage Superstore at 575-769-9006 to discuss your situation with one of our professionals.
There are many types of Adjustable Rate Mortgages. ARMs are normally adjusted every six months, based on various indexes.
The majority of ARMs feature this cap, so they won't increase over a specified amount in a given period. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than two percent per year, even though the index the rate is based on goes up by more than two percent. Sometimes an ARM features a "payment cap" which ensures your payment won't increase beyond a certain amount over the course of a given year. Almost all ARMs also cap your rate over the life of the loan period.
ARMs most often feature their lowest, most attractive rates at the beginning. They usually guarantee the lower rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then adjust. These loans are usually best for people who anticipate moving within three or five years. These types of adjustable rate loans are best for borrowers who plan to move before the loan adjusts.
Most borrowers who choose ARMs choose them because they want to get lower introductory rates and do not plan on staying in the house for any longer than this initial low-rate period. ARMs can be risky in a down market because homeowners can get stuck with rates that go up when they cannot sell their home or refinance at the lower property value.
Have questions about mortgage loans? Call us at 575-769-9006. We answer questions about different types of loans every day.