Adjustable versus fixed loans
With a fixed-rate loan, your payment never changes for the entire duration of your loan. The amount of the payment that goes for principal (the amount you borrowed) increases, but your interest payment will go down in the same amount. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally payments on your fixed-rate mortgage will increase very little.
At the beginning of a a fixed-rate mortgage loan, the majority your payment is applied to interest. The amount paid toward your principal amount goes up gradually every month.
You can choose a fixed-rate loan to lock in a low interest rate. People choose these types of loans when interest rates are low and they wish to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at a favorable rate. Call Chase Mortgage at 435-755-6622 to discuss how we can help.
There are many different types of Adjustable Rate Mortgages. ARMs are normally adjusted every six months, based on various indexes.
Most programs have a "cap" that protects you from sudden monthly payment increases. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount the payment can go up in a given period. Plus, the great majority of adjustable programs have a "lifetime cap" — this means that your interest rate will never go over the cap amount.
ARMs most often have their lowest, most attractive rates at the start of the loan. They provide that rate from a month to ten years. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the introductory rate is set 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 after the initial period. These loans are usually best for people who anticipate moving in three or five years. These types of ARMs are best for people who plan to sell their house or refinance before the loan adjusts.
Most people who choose ARMs do so when they want to get lower introductory rates and do not plan on remaining in the home longer than the initial low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates when they can't sell or refinance with a lower property value.
Have questions about mortgage loans? Call us at 435-755-6622. We answer questions about different types of loans every day.