Differences between adjustable and fixed rate loans
A fixed-rate loan features a fixed payment amount over the life of your mortgage. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part payments on your fixed-rate mortgage will be very stable.
At the beginning of a a fixed-rate mortgage loan, most of your payment goes toward interest. As you pay , more of your payment goes toward principal.
You might 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 this lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at the best rate currently available. Call Chase Mortgage at 435-755-6622 for details.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. ARMs are generally adjusted every six months, based on various indexes.
The majority of Adjustable Rate Mortgages are capped, which means they won't go up over a certain amount in a given period of time. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which ensures that your payment can't go above a fixed amount in a given year. Plus, almost all ARM programs feature a "lifetime cap" — your interest rate can't ever go over the cap percentage.
ARMs most often have the lowest, most attractive rates toward the beginning. They guarantee the lower interest rate from a month to ten years. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory 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 after the initial period. Loans like this are usually best for people who expect to move in three or five years. These types of adjustable rate programs benefit borrowers who plan to move before the initial lock expires.
Most people who choose ARMs do so because they want to take advantage of lower introductory rates and don't plan on remaining in the house longer than this initial low-rate period. ARMs can be risky when property values decrease and borrowers can't sell their home or refinance their loan.
Have questions about mortgage loans? Call us at 435-755-6622. It's our job to answer these questions and many others, so we're happy to help!