Fixed versus adjustable rate loans
A fixed-rate loan features the same payment for the entire duration of the mortgage. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but in general, payments on fixed rate loans don't increase much.
At the beginning of a a fixed-rate mortgage loan, the majority the payment is applied to interest. As you pay , more of your payment goes toward principal.
Borrowers might choose a fixed-rate loan to lock in a low rate. Borrowers choose fixed-rate loans when 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 provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at the best rate currently available. Call Saab Mortgage at 703-288-0777 to learn more.
Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. ARMs usually adjust twice a year, based on various indexes.
Most ARM programs feature a cap that protects borrowers from sudden monthly payment increases. Some ARMs can't increase more than two percent per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that your payment can increase in one period. Additionally, the great majority of ARM programs have a "lifetime cap" — this cap means that your interest rate won't go over the cap percentage.
ARMs most often feature the lowest, most attractive rates at the beginning of the loan. They usually provide the lower rate for an initial period that varies greatly. 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 usually best for people who anticipate moving in three or five years. These types of ARMs are best for people who will move before the initial lock expires.
You might choose an Adjustable Rate Mortgage to take advantage of a lower initial interest rate and count on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs are risky when property values decrease and borrowers cannot sell their home or refinance.
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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