Differences between fixed and adjustable loans
With a fixed-rate loan, your monthly payment remains the same for the life of the mortgage. The amount of the payment allocated to principal (the amount you borrowed) will go up, however, the amount you pay in interest will go down accordingly. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally payments on a fixed-rate loan will increase very little.
At the beginning of a a fixed-rate mortgage loan, the majority the payment goes toward interest. The amount applied to your principal amount goes up gradually every month.
Borrowers can choose a fixed-rate loan to lock in a low rate. People select these types of loans when interest rates are low and they want to lock in at the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at the best rate currently available. Call First Community Bank of Central Al. at (334) 285-8850 for details.
There are many different kinds of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.
Most Adjustable Rate Mortgages feature this cap, which means they can't increase above a certain amount in a given period. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount the payment can increase in a given period. Most ARMs also cap your rate over the duration of the loan.
ARMs most often have the lowest rates toward the beginning. They usually guarantee that rate for an initial period that varies greatly. You've likely read about 5/1 or 3/1 ARMs. In these loans, the initial rate is fixed for three or five years. It then adjusts every year. These loans are fixed for a number of years (3 or 5), then they adjust after the initial period. Loans like this are best for borrowers who anticipate moving within three or five years. These types of ARMs benefit borrowers who will sell their house or refinance before the loan adjusts.
Most people who choose ARMs choose them when they want to get lower introductory rates and do not plan on staying in the house longer than the introductory low-rate period. ARMs can be risky in a down market because homeowners could be stuck with increasing rates 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.