Adjustable versus fixed loans
A fixed-rate loan features the same payment for the entire duration of the loan. The property tax 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 are applied mostly toward interest. As you pay , more of your payment goes toward principal.
You might choose a fixed-rate loan to lock in a low rate. People select these types of loans because interest rates are low and they wish to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at the best rate currently available. Call The Mortgage Exchange Service LLC at 703.255-5810 for details.
Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs usually adjust twice a year, based on various indexes.
Most Adjustable Rate Mortgages are capped, which means they can't go up above a specified amount in a given period. Some ARMs won't adjust 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 your monthly payment can increase in one period. Most ARMs also cap your interest rate over the duration of the loan.
ARMs most often feature their lowest, most attractive rates at the start. They usually guarantee the lower interest rate from a month to ten years. 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 loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are best for borrowers 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 choose them when they want to get lower introductory rates and do not plan to stay in the house for any longer than this introductory low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates if they can't sell their home or refinance with a lower property value.
Have questions about mortgage loans? Call us at 703.255-5810. We answer questions about different types of loans every day.