Differences between fixed and adjustable loans
A fixed-rate loan features a fixed payment amount for the entire duration of your loan. The property taxes and homeowners insurance will go up over time, but generally, payments on fixed rate loans vary little.
Your first few years of payments on a fixed-rate loan go primarily toward interest. As you pay on the loan, more of your payment is applied to principal.
You can choose a fixed-rate loan to lock in a low rate. People choose fixed-rate loans when interest rates are low and they wish to lock in this low 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'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 to discuss how we can help.
Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. ARMs usually adjust every six months, based on various indexes.
The majority of ARMs are capped, which means they can't go up above a certain amount in a given period of time. Some ARMs won't increase more than 2% 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 that the payment can go up in a given period. Plus, the great majority of ARMs have a "lifetime cap" — this means that the rate will never exceed the cap percentage.
ARMs usually start at a very low rate that usually increases as the loan ages. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is set for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then adjust. Loans like this are often best for borrowers who expect to move within three or five years. These types of adjustable rate loans are best for people who plan to sell their house or refinance before the initial lock expires.
You might choose an Adjustable Rate Mortgage to get a lower introductory rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky in a down market because homeowners could be stuck with rates that go up when they can't sell 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.