Differences between fixed and adjustable loans
With a fixed-rate loan, your monthly payment never changes for the entire duration of the loan. The amount of the payment allocated for your principal (the loan amount) will increase, but the amount you pay in interest will go down accordingly. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part monthly payments on a fixed-rate mortgage will increase very little.
At the beginning of a a fixed-rate mortgage loan, the majority the payment is applied to interest. The amount paid toward your principal amount increases up gradually every month.
You might choose a fixed-rate loan to lock in a low rate. People select 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 into a fixed-rate loan can provide more 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 Channel Mortgage LLC at 7186399500 for details.
There are many different kinds of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.
Most ARMs are capped, which means they can't increase above a certain amount in a given period of time. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount your monthly payment can increase in one period. Most ARMs also cap your rate over the duration of the loan period.
ARMs usually start at a very low rate that usually increases over time. 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 loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are best for borrowers who anticipate moving in three or five years. These types of adjustable rate loans are best for borrowers who will move before the loan adjusts.
You might choose an ARM to take advantage of a very low initial rate and plan on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs are risky if property values decrease and borrowers are unable to sell or refinance their loan.
Have questions about mortgage loans? Call us at 7186399500. It's our job to answer these questions and many others, so we're happy to help!