Differences between fixed and adjustable loans
A fixed-rate loan features the same payment amount for the entire duration of the loan. The property taxes and homeowners insurance will increase over time, but in general, payment amounts on these types of loans change little over the life of the loan.
Your first few years of payments on a fixed-rate loan go primarily toward interest. As you pay on the loan, more of your payment goes toward principal.
You can choose a fixed-rate loan to lock in a low rate. Borrowers select these types of loans when interest rates are low and they wish to lock in at this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call The Mortgage Exchange Service LLC at 703.255-5810 for details.
There are many different types of Adjustable Rate Mortgages. ARMs are normally adjusted twice a year, based on various indexes.
Most Adjustable Rate Mortgages are capped, which means they won't increase above a specified amount in a given period. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than a couple percent a year, even though the index the rate is based on goes up by more than two percent. Sometimes an ARM features a "payment cap" which guarantees that your payment won't go above a fixed amount over the course of a given year. In addition, the great majority of ARM programs feature a "lifetime cap" — this means that your rate can't exceed the capped amount.
ARMs usually start out at a very low rate that usually increases over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These loans are fixed for a certain number of years (3 or 5), then they adjust. These loans are often best for people who anticipate moving in three or five years. These types of ARMs benefit borrowers who will move 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 home longer than the introductory low-rate period. ARMs can be risky in a down market because homeowners can get stuck with rates that go up when they cannot sell their home or refinance with a lower property value.
Have questions about mortgage loans? Call us at 703.255-5810. It's our job to answer these questions and many others, so we're happy to help!