Differences between fixed and adjustable rate loans
A fixed-rate loan features the same payment amount over the life of your loan. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. For the most part payments for a fixed-rate loan will increase very little.
When you first take out a fixed-rate mortgage loan, most of your payment goes toward interest. As you pay on the loan, more of your payment goes toward principal.
You might choose a fixed-rate loan to lock in a low interest rate. People choose fixed-rate loans because interest rates are low and they want to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater stability 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 a favorable rate. Call The Mortgage Exchange Service LLC at 703.255-5810 for details.
Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. ARMs usually adjust every six months, based on various indexes.
Most ARM programs feature a cap that protects borrowers from sudden monthly payment increases. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which guarantees that your payment won't increase beyond a certain amount in a given year. Most ARMs also cap your interest rate over the duration 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 introductory rate is set 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 adjust after the initial period. These loans are often best for people who anticipate moving within three or five years. These types of ARMs benefit borrowers who plan to sell their house or refinance before the loan adjusts.
Most people who choose ARMs do so because they want to get lower introductory rates and don't plan to remain in the home longer than the initial low-rate period. ARMs can be risky if property values go down and borrowers cannot sell or refinance their loan.
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!