Fixed versus adjustable rate loans
A fixed-rate loan features the same payment for the entire duration of the loan. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally payment amounts on your fixed-rate loan will increase very little.
Your first few years of payments on a fixed-rate loan are applied primarily to pay 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 interest rate. Borrowers choose fixed-rate loans when interest rates are low and they want to lock in this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at the best rate currently available. Call American Financial Solutions, Inc. at 708-788-2300 for details.
Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. ARMs are generally adjusted twice a year, based on various indexes.
Most ARM programs feature a cap that protects borrowers from sudden increases in monthly payments. 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 underlying index increases by more than two percent. Sometimes an ARM features a "payment cap" that ensures that your payment will not go above a certain amount over the course of a given year. Almost all ARMs also cap your rate over the life of the loan.
ARMs usually start out at a very low rate that usually increases over time. You've likely heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are usually best for borrowers who expect to move within three or five years. These types of adjustable rate programs are best for people who plan to sell their house or refinance before the initial lock expires.
Most borrowers who choose ARMs choose them when they want to take advantage of lower introductory rates and do not plan to remain in the house for any longer than the initial low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up if they can't sell or refinance with a lower property value.
Have questions about mortgage loans? Call us at 708-788-2300. It's our job to answer these questions and many others, so we're happy to help!