Differences between fixed and adjustable loans
With a fixed-rate loan, your payment remains the same for the life of your loan. The portion allocated to your principal (the amount you borrowed) goes up, however, the amount you pay in interest will go down in the same amount. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally monthly payments for your fixed-rate mortgage will increase very little.
Your first few years of payments on a fixed-rate loan go primarily toward interest. As you pay on the loan, more of your payment goes toward principal.
Borrowers might choose a fixed-rate loan in order to lock in a low rate. Borrowers choose these types of loans because interest rates are low and they want to lock in the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more 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 for details.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. ARMs are generally adjusted every six months, based on various indexes.
Most ARM programs have a "cap" that protects borrowers from sudden monthly payment increases. There may be a cap on how much your interest rate can increase in one period. For example: no more than a couple percent a year, even if 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 that the payment can increase in a given period. Plus, almost all ARM programs have a "lifetime cap" — this cap means that the rate can't go over the cap amount.
ARMs usually start out at a very low rate that may increase as the loan ages. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These types of loans are fixed for a certain number of years (3 or 5), then adjust after the initial period. These loans are often best for borrowers who expect to move within three or five years. These types of adjustable rate programs benefit people who plan to move before the initial lock expires.
Most people who choose ARMs choose them when they want to take advantage of lower introductory rates and don't plan on staying in the house for any longer than this initial low-rate period. ARMs can be risky when property values go down and borrowers cannot 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!