Differences between adjustable and fixed rate loans
With a fixed-rate loan, your payment never changes for the entire duration of the loan. The portion of the payment that goes to your principal (the loan amount) increases, however, the amount you pay in interest will decrease in the same amount. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally payment amounts on a fixed-rate mortgage will increase very little.
During the early amortization period of a fixed-rate loan, a large percentage of your monthly payment pays interest, and a significantly smaller percentage toward principal. As you pay , more of your payment is applied to principal.
You can choose a fixed-rate loan to lock in a low rate. Borrowers choose these types of loans when interest rates are low and they wish to lock in the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at a favorable rate. Call First Community Bank of Central Al. at (334) 285-8850 to learn more.
Adjustable Rate Mortgages — ARMs, come in many varieties. ARMs usually adjust twice a year, based on various indexes.
The majority of Adjustable Rate Mortgages are capped, so they can't increase over a certain amount in a given period. Some ARMs won't increase 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 that the monthly payment can go up in one period. The majority of ARMs also cap your interest rate over the life of the loan.
ARMs most often have their lowest, most attractive rates toward the beginning. They usually provide that interest rate from a month to ten years. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then they adjust after the initial period. These loans are usually best for borrowers who anticipate moving within three or five years. These types of ARMs are best for people who will sell their house or refinance before the loan adjusts.
Most borrowers who choose ARMs choose them when they want to take advantage of lower introductory rates and do not plan to remain in the house for any longer than this introductory low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up when they can't sell their home or refinance at the lower property value.
Have questions about mortgage loans? Call us at (334) 285-8850. It's our job to answer these questions and many others, so we're happy to help!