Differences between fixed and adjustable loans
A fixed-rate loan features a fixed payment for the entire duration of the mortgage. The property taxes and homeowners insurance will go up over time, but in general, payments on fixed rate loans vary little.
During the early amortization period of a fixed-rate loan, a large percentage of your payment goes toward interest, and a much smaller percentage toward principal. The amount applied to your principal amount goes up gradually each month.
Borrowers can choose a fixed-rate loan to lock in a low rate. People select these types of loans when interest rates are low and they wish to lock in this lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call The Mortgage Exchange Service LLC at 703.255-5810 to discuss your situation with one of our professionals.
Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. ARMs usually adjust twice a year, based on various indexes.
Most programs have a "cap" that protects borrowers from sudden increases in monthly payments. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than two 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" that ensures your payment will not increase beyond a certain amount in a given year. In addition, almost all ARMs feature a "lifetime cap" — your rate can't ever exceed the cap percentage.
ARMs usually start at a very low rate that usually increases over time. You've likely heard of 5/1 or 3/1 ARMs. In these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then adjust. Loans like this are usually best for borrowers who anticipate moving within three or five years. These types of adjustable rate loans most benefit borrowers who will sell their house or refinance before the initial lock expires.
You might choose an Adjustable Rate Mortgage to get a lower initial interest rate and plan on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs are risky if property values go down and borrowers cannot sell or refinance.
Have questions about mortgage loans? Call us at 703.255-5810. We answer questions about different types of loans every day.