Fixed versus adjustable loans
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A fixed-rate loan features the same payment for the entire duration of your loan. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but for the most part, payment amounts on these types of loans vary little.
Early in a fixed-rate loan, a large percentage of your monthly payment goes toward interest, and a significantly smaller part goes to principal. As you pay on the loan, more of your payment is applied to principal.
You can choose a fixed-rate loan to lock in a low rate. People choose 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 provide more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at a good rate. Call Eagle Platinum Mortgage at (800) 763-7154 EXT 3 to discuss your situation with one of our professionals.
There are many types of Adjustable Rate Mortgages. ARMs are generally adjusted twice a year, based on various indexes.
Most ARM programs feature a cap that protects you from sudden increases in monthly payments. Your ARM may feature a cap on how much your interest rate can go up in one period. 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" that guarantees that your payment won't increase beyond a certain amount over the course of a given year. Additionally, almost all adjustable programs have a "lifetime cap" — your interest rate can't exceed the cap percentage.
ARMs usually start out at a very low rate that usually increases as the loan ages. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are usually best for people who expect to move in three or five years. These types of adjustable rate loans benefit people who will move before the initial lock expires.
You might choose an Adjustable Rate Mortgage to get a lower initial rate and count on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs can be risky in a down market because homeowners can get stuck with rates that go up when they can't sell or refinance with a lower property value.
Have questions about mortgage loans? Call us at (800) 763-7154 EXT 3. It's our job to answer these questions and many others, so we're happy to help!