Differences between fixed and adjustable loans
A fixed-rate loan features a fixed payment amount over the life of the mortgage. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part monthly payments for your fixed-rate mortgage will increase very little.
When you first take out a fixed-rate mortgage loan, the majority your payment is applied to interest. The amount paid toward principal increases up slowly each month.
Borrowers can choose a fixed-rate loan to lock in a low rate. Borrowers choose these types of loans when interest rates are low and they want to lock in the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at a good rate. Call Chris Caggiano - Grand Oaks Funding, LLC at (718) 477-4405 to learn more.
There are many different types of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.
Most programs have a "cap" that protects borrowers from sudden increases in monthly payments. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which ensures your payment will not go above a certain amount in a given year. Most ARMs also cap your interest rate over the life of the loan period.
ARMs usually start at a very low rate that may increase over time. You may have heard about "3/1 ARMs" or "5/1 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 3 or 5 years, then they adjust after the initial period. Loans like this are often best for people who expect to move in three or five years. These types of adjustable rate programs benefit people who will move before the loan adjusts.
Most borrowers who choose ARMs do so because they want to get lower introductory rates and don't plan on staying in the home longer than this introductory low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up when they can't sell or refinance with a lower property value.
Have questions about mortgage loans? Call us at (718) 477-4405. We answer questions about different types of loans every day.