Differences between fixed and adjustable rate loans
A fixed-rate loan features the same payment for the entire duration of the loan. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally monthly payments for a fixed-rate mortgage will be very stable.
Your first few years of payments on a fixed-rate loan are applied mostly to pay interest. As you pay , more of your payment is applied to principal.
You can choose a fixed-rate loan in order to lock in a low rate. Borrowers select fixed-rate loans when interest rates are low and they want 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'd love to assist you in locking a fixed-rate at a good rate. Call Chris Caggiano - Grand Oaks Funding, LLC at (718) 477-4405 to learn more.
Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. ARMs usually adjust twice a year, based on various indexes.
The majority of Adjustable Rate Mortgages are capped, so they won't go up above a specified amount in a given period. There may be a cap on interest rate increases over the course of a year. For example: no more than a couple percent a year, even though the underlying index increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount your payment can increase in a given period. Most ARMs also cap your interest rate over the duration of the loan.
ARMs most often feature the lowest, most attractive rates toward the beginning. They provide the lower rate for an initial period that varies greatly. You've probably read about 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 loans are fixed for a number of years (3 or 5), then they adjust. Loans like this are best for borrowers who anticipate moving in three or five years. These types of ARMs most benefit borrowers who will move before the initial lock expires.
Most people who choose ARMs do so when they want to get lower introductory rates and do not plan on remaining in the house longer than this introductory low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates 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.