Fixed versus adjustable loans
A fixed-rate loan features the same payment for the entire duration of the mortgage. The property tax and homeowners insurance will increase over time, but generally, payments on fixed rate loans vary little.
Your first few years of payments on a fixed-rate loan are applied mostly toward interest. As you pay on the loan, more of your payment is applied to principal.
You might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select these types of loans because interest rates are low and they want to lock in the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at a good rate. Call America's Home Loans at 701.222.0100 to discuss your situation with one of our professionals.
There are many different kinds of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.
Most ARMs feature this cap, which means they won't go up above a certain amount in a given period of time. There may be a cap on interest rate increases over the course of a year. For example: no more than a couple percent a year, even if the underlying index goes up by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount the monthly payment can increase in one period. Plus, almost all ARM programs have a "lifetime cap" — this cap means that the interest rate can't ever go over the cap amount.
ARMs most often feature the lowest rates toward the start of the loan. They provide the lower interest rate for an initial period that varies greatly. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for a certain number of years (3 or 5), then adjust after the initial period. These loans are usually best for people who expect to move within three or five years. These types of adjustable rate programs benefit people who plan to move before the loan adjusts.
Most borrowers who choose ARMs choose them when they want to get lower introductory rates and do not plan on remaining in the home for any longer than this introductory 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 their home or refinance with a lower property value.
Have questions about mortgage loans? Call us at 701.222.0100. We answer questions about different types of loans every day.