Differences between fixed and adjustable rate loans
With a fixed-rate loan, your monthly payment doesn't change for the entire duration of your loan. The amount that goes to your principal (the loan amount) will increase, but the amount you pay in interest will decrease accordingly. The property tax and homeowners insurance will go up over time, but for the most part, payment amounts 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. The amount applied to your principal amount goes up gradually every month.
You might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose 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 offer greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at a good rate. Call First Community Bank of Central Al. at (334) 285-8850 for details.
There are many kinds of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.
Most programs feature a "cap" that protects borrowers from sudden monthly payment increases. There may be a cap on interest rate increases over the course of a year. For example: no more than two percent per year, even though the underlying index goes up by more than two percent. Sometimes an ARM features a "payment cap" which ensures your payment won't go above a fixed amount in a given year. The majority of ARMs also cap your interest rate over the life of the loan.
ARMs most often feature their lowest rates toward the start of the loan. They usually guarantee that interest rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is set for three or five years. It then adjusts every year. These types of loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are often best for borrowers who anticipate moving in three or five years. These types of adjustable rate programs are best for people who plan to move before the initial lock expires.
Most borrowers who choose ARMs choose them when they want to get lower introductory rates and do not plan to remain in the home longer than this initial low-rate period. ARMs can be risky in a down market because homeowners could be stuck with rates that go up if they can't sell their home or refinance with a lower property value.
Have questions about mortgage loans? Call us at (334) 285-8850. We answer questions about different types of loans every day.