Adjustable versus fixed rate loans
With a fixed-rate loan, your monthly payment stays the same for the life of the mortgage. 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 in general, payments on fixed rate loans change little over the life of the loan.
Your first few years of payments on a fixed-rate loan go primarily toward interest. This proportion reverses as the loan ages.
Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose these types of loans when interest rates are low and they want to lock in the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at a favorable rate. Call CHASE MORTGAGE INC #317430 at 435-755-6622 to discuss how we can help.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. ARMs usually adjust twice a year, based on various indexes.
The majority of Adjustable Rate Mortgages are capped, so they can't increase above a specified amount in a given period. Some ARMs won't increase 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 that your payment can go up in one period. Additionally, almost all adjustable programs have a "lifetime cap" — this means that your interest rate won't exceed the capped amount.
ARMs usually start at a very low rate that usually increases over time. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for a certain number of years (3 or 5), then they adjust. Loans like this are often best for borrowers who anticipate moving within three or five years. These types of ARMs benefit people who will move before the initial lock expires.
Most borrowers who choose ARMs choose them because they want to get lower introductory rates and don't plan to stay in the home longer than this initial low-rate period. ARMs are risky if property values go down and borrowers can't sell their home or refinance.
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!