Differences between adjustable and fixed loans
A fixed-rate loan features the same payment amount over the life of your mortgage. The property taxes and homeowners insurance will increase over time, but in general, payments on these types of loans vary little.
Your first few years of payments on a fixed-rate loan are applied primarily to pay interest. The amount applied to principal goes up gradually every month.
Borrowers might choose a fixed-rate loan to lock in a low interest rate. People choose these types of loans because interest rates are low and they want to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can 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 kinds of Adjustable Rate Mortgages. ARMs are normally adjusted every six months, based on various indexes.
Most ARM programs have a cap that protects borrowers from sudden monthly payment increases. Some ARMs can't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that ensures that your payment will not increase beyond a certain amount over the course of a given year. The majority of ARMs also cap your interest rate over the life of the loan period.
ARMs most often feature the lowest, most attractive rates at the beginning of the loan. They usually guarantee that interest rate from a month to ten years. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then adjust. Loans like this are best for people who expect to move in three or five years. These types of adjustable rate loans most benefit borrowers who will sell their house or refinance before the initial lock expires.
Most people who choose ARMs choose them because they want to take advantage of lower introductory rates and do not plan to stay in the house 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 with a 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!