Differences between fixed and adjustable rate loans
A fixed-rate loan features a fixed payment amount for the entire duration of your mortgage. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally payment amounts for your fixed-rate loan will increase very little.
Your first few years of payments on a fixed-rate loan go mostly toward interest. The amount paid toward your principal amount increases up gradually each month.
Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. People choose fixed-rate loans because interest rates are low and they wish to lock in the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at a favorable rate. Call The Mortgage Exchange Service LLC at 703.255-5810 for details.
There are many kinds of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.
Most programs feature a "cap" that protects borrowers from sudden increases in monthly payments. There may be 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 index the rate is based on increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount your monthly payment can go up in a given period. Plus, almost all ARM programs feature a "lifetime cap" — this cap means that the interest rate will never exceed the cap percentage.
ARMs most often feature the 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 may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial 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 adjust after the initial period. These loans are best for people who anticipate moving in three or five years. These types of adjustable rate programs most 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 in a down market because homeowners can get stuck with rates that go up if they cannot sell their home or refinance at the lower property value.
Have questions about mortgage loans? Call us at 703.255-5810. We answer questions about different types of loans every day.