Fixed versus adjustable loans
A fixed-rate loan features a fixed payment amount for the entire duration of the loan. The property taxes and homeowners insurance will go up over time, but generally, payment amounts on fixed rate loans vary little.
At the beginning of a a fixed-rate mortgage loan, the majority your payment is applied to interest. The amount applied to principal increases up gradually every month.
Borrowers might choose a fixed-rate loan to lock in a low interest rate. Borrowers choose fixed-rate loans when interest rates are low and they wish to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide more stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at a good rate. Call Diamond Mortgage Lending at 888-365-2023 to learn more.
Adjustable Rate Mortgages — ARMs, come in many varieties. ARMs are normally adjusted every six months, based on various indexes.
Most ARM programs feature a "cap" that protects you from sudden monthly payment increases. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than two percent per year, even though the index the rate is based on goes up by more than two percent. Sometimes an ARM has a "payment cap" which guarantees your payment can't increase beyond a fixed amount over the course of a given year. Additionally, the great majority of ARMs feature a "lifetime cap" — this cap means that the rate can't ever go over the capped percentage.
ARMs usually start at a very low rate that may increase over time. You've probably read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These kinds of loans are fixed for a certain number of years (3 or 5), then adjust after the initial period. These loans are often best for borrowers who anticipate moving within three or five years. These types of adjustable rate programs most benefit borrowers who plan to sell their house or refinance before the initial lock expires.
You might choose an Adjustable Rate Mortgage to get a lower introductory interest 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 cannot sell or refinance their loan.
Have questions about mortgage loans? Call us at 888-365-2023. We answer questions about different types of loans every day.