Fixed versus adjustable rate loans
A fixed-rate loan features the same payment for the entire duration of your mortgage. The property tax and homeowners insurance will increase over time, but generally, payments on these types of loans vary little.
During the early amortization period of a fixed-rate loan, a large percentage of your payment goes toward interest, and a much smaller part toward principal. The amount paid toward your principal amount goes up slowly each month.
You might choose a fixed-rate loan to lock in a low interest rate. People select these types of loans because interest rates are low and they want to lock in this low rate. For homeowners who have an 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 a good rate. Call The Rate Kings Mortgage LLC at 610-572-3635 to discuss how we can help.
Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. ARMs usually adjust twice a year, based on various indexes.
Most Adjustable Rate Mortgages feature this cap, so they won't go up over a certain amount in a given period of time. 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 directly, caps the amount your monthly payment can increase in a given period. Additionally, the great majority of ARMs have a "lifetime cap" — this means that the interest rate won't go over the capped amount.
ARMs most often feature the lowest, most attractive rates at the start of the loan. They provide the lower interest rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory 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. These loans are usually best for people who expect to move in three or five years. These types of adjustable rate loans are best for people who plan to move before the initial lock expires.
Most borrowers who choose ARMs choose them because they want to take advantage of lower introductory rates and do not plan on staying in the home for any longer than the introductory low-rate period. ARMs can be risky if property values decrease and borrowers are unable to sell or refinance.