Fixed versus adjustable rate loans
With a fixed-rate loan, your payment never changes for the entire duration of your mortgage. The portion allocated for principal (the actual loan amount) will go up, but your interest payment will go down in the same amount. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part payment amounts for your fixed-rate loan will be very stable.
During the early amortization period of a fixed-rate loan, a large percentage of your monthly payment pays interest, and a much smaller part goes to principal. That reverses as the loan ages.
You might choose a fixed-rate loan in order to lock in a low rate. People choose these types of loans because interest rates are low and they wish to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater stability 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 America's Home Loans at 701.222.0100 for details.
There are many kinds of Adjustable Rate Mortgages. ARMs are normally adjusted every six months, based on various indexes.
The majority of Adjustable Rate Mortgages feature this cap, so they can't increase above a specified amount in a given period of time. 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 index the rate is based on increases by more than two percent. Sometimes an ARM features a "payment cap" which guarantees your payment won't go above a fixed amount over the course of a given year. Plus, the great majority of ARMs have a "lifetime cap" — this means that the interest rate can't exceed the capped percentage.
ARMs most often have the lowest, most attractive rates toward the beginning. They usually provide that interest rate for an initial period that varies greatly. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These types of loans are fixed for a number of years (3 or 5), then they adjust. Loans like this are best for borrowers who anticipate moving within three or five years. These types of ARMs most benefit people who plan to move before the initial lock expires.
You might choose an ARM to take advantage of a lower initial interest rate and count on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs can be risky in a down market because homeowners can get stuck with increasing rates when they can't sell their home or refinance with a lower property value.
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!