Differences between fixed and adjustable rate loans
A fixed-rate loan features a fixed payment over the life of your loan. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but for the most part, payment amounts on fixed rate loans vary little.
Your first few years of payments on a fixed-rate loan are applied mostly to pay interest. That gradually reverses itself as the loan ages.
You can choose a fixed-rate loan in order to lock in a low rate. Borrowers select these types of loans when interest rates are low and they want 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 monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at the best rate currently available. Call America's Home Loans at 701.222.0100 to discuss how we can help.
Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. ARMs usually adjust every six months, 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 how much your interest rate can increase in one period. For example: no more than two 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 rate directly, caps the amount the monthly payment can go up in a given period. Most ARMs also cap your interest rate over the life of the loan.
ARMs usually start at a very low rate that usually increases as the loan ages. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set 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 usually best for borrowers who anticipate moving within three or five years. These types of adjustable rate loans benefit borrowers who will sell their house or refinance before the initial lock expires.
You might choose an ARM to get a lower initial rate and count on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs are risky when property values go down and borrowers can't sell or refinance.
Have questions about mortgage loans? Call us at 701.222.0100. It's our job to answer these questions and many others, so we're happy to help!