Fixed versus adjustable rate loans
With a fixed-rate loan, your payment remains the same for the entire duration of the mortgage. The longer you pay, the more of your payment goes toward principal. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part payments on a fixed-rate mortgage will be very stable.
Your first few years of payments on a fixed-rate loan are applied mostly to pay interest. As you pay on the loan, more of your payment is applied to principal.
Borrowers might choose a fixed-rate loan to lock in a low rate. People select 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 into a fixed-rate loan can provide more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at the best rate currently available. Call Lending Arizona at 5208867283 to learn more.
Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs are normally adjusted twice a year, based on various indexes.
The majority of Adjustable Rate Mortgages are capped, so they won't go up above a specified amount in a given period. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than a couple percent per year, even though the index the rate is based on increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that the monthly payment can go up in one period. In addition, the great majority of adjustable programs feature a "lifetime cap" — this means that your rate can't exceed the capped amount.
ARMs usually start out at a very low rate that may increase as the loan ages. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In 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 number of years (3 or 5), then they adjust after the initial period. Loans like this are often best for borrowers who anticipate moving in three or five years. These types of adjustable rate loans are best for people who will sell their house or refinance before the loan adjusts.
You might choose an ARM to take advantage of a very low introductory interest rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky if property values go down and borrowers are unable to sell or refinance.
Have questions about mortgage loans? Call us at 5208867283. It's our job to answer these questions and many others, so we're happy to help!