Adjustable versus fixed loans
With a fixed-rate loan, your payment doesn't change for the life of your loan. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance will go up over time, but generally, payments on these types of loans don't increase much.
Your first few years of payments on a fixed-rate loan are applied primarily toward interest. As you pay on the loan, more of your payment goes toward principal.
Borrowers can choose a fixed-rate loan to lock in a low rate. Borrowers select these types of loans when interest rates are low and they wish to lock in at this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at a favorable rate. Call Saab Mortgage at 703-288-0777 to learn more.
There are many different types of Adjustable Rate Mortgages. ARMs are normally adjusted every six months, based on various indexes.
Most programs feature a cap that protects borrowers from sudden increases in monthly payments. Some ARMs can't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that guarantees that your payment will not increase beyond a certain amount in a given year. In addition, almost all adjustable programs feature a "lifetime cap" — this means that your rate can't exceed the cap amount.
ARMs most often feature their lowest rates toward the beginning. They provide that interest rate from a month to ten years. You've likely read about 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 after the initial period. Loans like this are often best for people who anticipate moving within three or five years. These types of adjustable rate programs most benefit people who will move before the initial lock expires.
You might choose an Adjustable Rate Mortgage to get a lower introductory interest rate and count on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs are risky when property values decrease and borrowers can't sell or refinance their loan.
Have questions about mortgage loans? Call us at 703-288-0777. It's our job to answer these questions and many others, so we're happy to help!
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