Fixed versus adjustable rate loans
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A fixed-rate loan features a fixed payment amount for the entire duration of the loan. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally payments on a fixed-rate loan will be very stable.
Early in a fixed-rate loan, a large percentage of your payment pays interest, and a significantly smaller part toward principal. The amount applied to your principal amount goes up gradually each month.
Borrowers might choose a fixed-rate loan in order to lock in a low rate. People choose fixed-rate 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 with a fixed-rate loan can offer greater stability 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 Hayes Home Loans at 918-633-9916 to learn more.
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 Adjustable Rate Mortgages are capped, so they can't go up over a certain amount in a given period. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than a couple percent a year, even though the index the rate is based on increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that your payment can go up in a given period. Plus, the great majority of ARMs feature a "lifetime cap" — your interest rate won't exceed the capped percentage.
ARMs most often have the lowest rates toward the start. They guarantee the lower rate from a month to ten years. 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 loans are fixed for a certain number of years (3 or 5), then they adjust after the initial period. These loans are usually best for borrowers who anticipate moving within three or five years. These types of adjustable rate loans benefit people who will sell their house or refinance before the loan adjusts.
You might choose an Adjustable Rate Mortgage to take advantage of a lower introductory rate and plan on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs can be risky when property values decrease and borrowers can't sell their home or refinance.
Have questions about mortgage loans? Call us at 918-633-9916. It's our job to answer these questions and many others, so we're happy to help!