Differences between fixed and adjustable rate loans
With a fixed-rate loan, your payment remains the same for the life of the mortgage. The portion of the payment allocated for principal (the amount you borrowed) will increase, but your interest payment will decrease accordingly. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part payment amounts for a fixed-rate mortgage will be very stable.
Early in a fixed-rate loan, a large percentage of your payment goes toward interest, and a much smaller percentage goes to principal. This proportion gradually reverses itself as the loan ages.
Borrowers might choose a fixed-rate loan in order to lock in a low rate. Borrowers choose fixed-rate loans because interest rates are low and they wish to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with 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 for details.
Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs usually adjust twice a year, based on various indexes.
Most programs feature a cap that protects borrowers from sudden increases in monthly payments. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than a couple percent a year, even if the underlying index increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount your monthly payment can increase in a given period. The majority of ARMs also cap your rate over the duration of the loan.
ARMs most often have their lowest, most attractive rates at the beginning of the loan. They usually provide the lower interest rate for an initial period that varies greatly. You've probably read about 5/1 or 3/1 ARMs. For these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These kinds of loans are fixed for a certain number of years (3 or 5), then they adjust after the initial period. These loans are usually best for people who anticipate moving within three or five years. These types of ARMs benefit borrowers who plan to move before the loan adjusts.
Most people who choose ARMs choose them when they want to get lower introductory rates and do not plan to remain in the house longer than this introductory low-rate period. ARMs can be risky when property values decrease and borrowers are unable to sell 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!