Adjustable versus fixed rate loans
With a fixed-rate loan, your payment stays the same for the entire duration of the mortgage. The amount of the payment that goes to your principal (the amount you borrowed) goes up, but the amount you pay in interest will go down accordingly. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally payment amounts on a fixed-rate mortgage will increase very little.
At the beginning of a a fixed-rate mortgage loan, the majority the payment goes toward interest. The amount paid toward your principal amount increases up slowly every month.
Borrowers might choose a fixed-rate loan to lock in a low interest rate. People select fixed-rate loans because interest rates are low and they wish to lock in at the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at a good rate. Call CHASE MORTGAGE INC #317430 at 435-755-6622 to learn more.
There are many kinds of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.
Most ARMs feature this cap, which means they can't go up over a certain amount in a given period of time. There may be a cap on how much your interest rate can go up in one period. For example: no more than a couple percent per year, even though the index the rate is based on increases by more than two percent. Sometimes an ARM features a "payment cap" that guarantees that your payment can't increase beyond a certain amount in a given year. The majority of ARMs also cap your interest rate over the life of the loan.
ARMs usually start out 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 set for three or five years. It then adjusts every year. These types of loans are fixed for 3 or 5 years, then adjust. Loans like this are usually best for people who expect to move within three or five years. These types of adjustable rate programs most benefit borrowers who plan to sell their house or refinance before the initial lock expires.
Most borrowers who choose ARMs do so when they want to take advantage of lower introductory rates and don't plan on remaining in the house longer than the initial low-rate period. ARMs are risky when property values go down and borrowers cannot sell 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!