Differences between fixed and adjustable loans
A fixed-rate loan features the same payment amount for the entire duration of your loan. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part monthly payments on a fixed-rate loan will increase very little.
Early in a fixed-rate loan, a large percentage of your monthly payment pays interest, and a much smaller part goes to principal. As you pay , more of your payment is applied to principal.
You might choose a fixed-rate loan to lock in a low interest rate. People choose 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 with a fixed-rate loan can offer more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at the best rate currently available. Call Saab Mortgage at 703-288-0777 to learn more.
There are many types of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.
The majority of Adjustable Rate Mortgages feature this cap, so they won't increase above a specific amount in a given period. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than a couple percent per year, even though the index the rate is based on goes up by more than two percent. Sometimes an ARM features a "payment cap" which guarantees your payment won't increase beyond a fixed amount in a given year. The majority of ARMs also cap your rate over the duration of the loan.
ARMs most often have the lowest rates at the beginning. They usually provide the lower rate from a month to ten years. You've likely heard of 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 adjust after the initial period. These loans are best for borrowers who anticipate moving in three or five years. These types of adjustable rate programs most benefit borrowers who plan to move before the loan adjusts.
You might choose an ARM to get a very low introductory interest rate and count on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs can be risky in a down market because homeowners can get stuck with increasing rates if they cannot sell or refinance at the lower property value.
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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