Differences between adjustable and fixed loans
With a fixed-rate loan, your payment never changes for the life of your loan. The amount that goes to your principal (the actual loan amount) will go up, however, 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 in general, payments on these types of loans vary little.
At the beginning of a a fixed-rate loan, the majority the payment is applied to 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. People select fixed-rate loans because interest rates are low and they wish to lock in at the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call Triumph Mortgage Inc at 8327302000 to learn more.
Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs are normally adjusted every six months, based on various indexes.
Most programs feature a "cap" that protects borrowers from sudden monthly payment increases. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than a couple percent per year, even if the underlying index goes up by more than two percent. Sometimes an ARM has a "payment cap" which guarantees your payment can't increase beyond a certain amount in a given year. Additionally, almost all ARM programs have a "lifetime cap" — this cap means that your interest rate can't go over the capped amount.
ARMs most often have their lowest rates at the start. They usually provide that interest rate from a month to ten years. You may hear people talking 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 3 or 5 years, then they adjust after the initial period. These loans are best for people who expect to move in three or five years. These types of adjustable rate loans are best for borrowers who will move before the initial lock expires.
You might choose an ARM to get a very low initial interest rate and plan on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs are risky when property values decrease and borrowers cannot sell or refinance.
Have questions about mortgage loans? Call us at 8327302000. We answer questions about different types of loans every day.