Adjustable versus fixed rate loans
A fixed-rate loan features a fixed payment for the entire duration of your loan. The property tax and homeowners insurance will go up over time, but for the most part, payment amounts on fixed rate loans change little over the life of the loan.
At the beginning of a a fixed-rate mortgage loan, the majority the payment goes toward interest. As you pay on the loan, more of your payment is applied to principal.
Borrowers might choose a fixed-rate loan in order to lock in a low rate. Borrowers select fixed-rate loans when interest rates are low and they wish to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at a good rate. Call First Community Bank of Central Al. at (334) 285-8850 for details.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. ARMs are normally adjusted twice a year, based on various indexes.
The majority of Adjustable Rate Mortgages feature this cap, so they can't go up above a certain amount in a given period of time. Some ARMs won't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that guarantees your payment can't increase beyond a certain amount in a given year. Additionally, almost all adjustable programs feature a "lifetime cap" — your rate can't exceed the cap amount.
ARMs usually start at a very low rate that usually increases over time. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then they adjust. These loans are usually best for borrowers who expect to move in three or five years. These types of adjustable rate programs are best for people who plan to sell their house or refinance before the loan adjusts.
You might choose an ARM to get a very low introductory rate and plan on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs can be risky if property values go down and borrowers cannot sell their home or refinance their loan.
Have questions about mortgage loans? Call us at (334) 285-8850. We answer questions about different types of loans every day.