Fixed versus adjustable loans
A fixed-rate loan features the same payment amount over the life of your mortgage. The property tax and homeowners insurance will increase over time, but for the most part, payments on fixed rate loans don't increase much.
Your first few years of payments on a fixed-rate loan are applied primarily toward interest. As you pay , more of your payment goes toward principal.
You can choose a fixed-rate loan in order to lock in a low rate. People choose these types of loans because interest rates are low and they wish to lock in at the low rate. If you have an Adjustable Rate Mortgage (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'd love to help you lock in a fixed-rate at a favorable rate. Call The Mortgage Exchange Service LLC at 703.255-5810 to discuss how we can help.
There are many different types of Adjustable Rate Mortgages. ARMs are generally adjusted twice a year, based on various indexes.
Most programs feature a "cap" that protects borrowers from sudden monthly payment increases. Some ARMs can't increase 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 rate directly, caps the amount that the payment can increase in a given period. Additionally, the great majority of ARM programs feature a "lifetime cap" — this cap means that the interest rate can't ever exceed the cap amount.
ARMs usually start at a very low rate that usually increases as the loan ages. You've likely heard of 5/1 or 3/1 ARMs. In these loans, the initial rate is set for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then they adjust. Loans like this are usually best for borrowers who anticipate moving in three or five years. These types of adjustable rate programs benefit borrowers who plan to sell their house or refinance before the initial lock expires.
You might choose an ARM to take advantage of a very low introductory interest rate and count on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates when they cannot sell or refinance at the 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!