Differences between adjustable and fixed rate loans
With a fixed-rate loan, your monthly payment never changes for the life of the loan. The portion of the payment that goes for principal (the actual loan amount) goes up, but your interest payment will go down accordingly. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but for the most part, payments on fixed rate loans vary little.
Early in a fixed-rate loan, most of your monthly payment pays interest, and a significantly smaller part toward principal. The amount paid toward principal increases up slowly every month.
Borrowers might choose a fixed-rate loan to lock in a low interest rate. Borrowers choose these types of loans when interest rates are low and they wish to lock in this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide more monthly payment stability. 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 Chris Caggiano - Grand Oaks Funding, LLC at (718) 477-4405 to discuss your situation with one of our professionals.
There are many different kinds of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.
The majority of ARMs feature this cap, which means they can't go up over a specified amount in a given period. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount that your payment can increase in a given period. Most ARMs also cap your rate over the life of the loan period.
ARMs usually start out at a very low rate that usually increases over time. You've probably read about 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 3 or 5 years, then they adjust. Loans like this are usually best for people who anticipate moving within three or five years. These types of adjustable rate programs benefit borrowers who will move before the loan adjusts.
Most borrowers who choose ARMs do so when they want to get lower introductory rates and do not plan to remain in the house longer than this introductory low-rate period. ARMs can be risky in a down market because homeowners can get stuck with rates that go up when they can't sell their home 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.