Differences between fixed and adjustable loans
With a fixed-rate loan, your monthly payment remains the same for the entire duration of your mortgage. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance will increase over time, but in general, payment amounts 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 , more of your payment is applied to principal.
Borrowers might choose a fixed-rate loan in order to lock in a low rate. Borrowers select these types of loans because interest rates are low and they want to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at a good rate. Call Saab Mortgage at 703-288-0777 to discuss your situation with one of our professionals.
There are many types of Adjustable Rate Mortgages. ARMs are generally adjusted every six months, based on various indexes.
Most ARM programs have a "cap" that protects you from sudden increases in monthly payments. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which ensures your payment will not increase beyond a certain amount in a given year. Plus, almost all ARM programs have a "lifetime cap" — this means that your interest rate can't exceed the cap percentage.
ARMs most often have their lowest, most attractive rates at the start of the loan. They provide the lower rate from a month to ten years. 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 loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are often best for people who expect to move in three or five years. These types of adjustable rate loans benefit borrowers who will sell their house or refinance before the loan adjusts.
You might choose an Adjustable Rate Mortgage to take advantage of a very low initial interest rate and count on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs are risky if property values go down and borrowers are unable to sell their home or refinance.
Have questions about mortgage loans? Call us at 703-288-0777. We answer questions about different types of loans every day.
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