Differences between adjustable and fixed loans
With a fixed-rate loan, your payment doesn't change for the life of your loan. The portion of the payment allocated for principal (the actual loan amount) will increase, but 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 for your fixed-rate loan will be very stable.
During the early amortization period of a fixed-rate loan, most of your payment goes toward interest, and a much smaller part goes to principal. This proportion reverses itself as the loan ages.
You can choose a fixed-rate loan to lock in a low interest rate. People select these types of loans when interest rates are low and they want to lock in at this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at the best rate currently available. Call Forum Mortgage Bancorp at (773) 774-9040 Ext 121 to learn more.
Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. ARMs are generally adjusted twice a year, based on various indexes.
The majority of Adjustable Rate Mortgages are capped, which means they won't go up over a specific amount in a given period of time. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than a couple percent a year, even if the index the rate is based on increases by more than two percent. Sometimes an ARM features a "payment cap" which guarantees that your payment can't go above a fixed amount in a given year. In addition, the great majority of ARM programs feature a "lifetime cap" — the interest rate can never go over the cap amount.
ARMs most often feature their lowest rates toward the start. They provide that rate from a month to ten years. You've probably heard of 5/1 or 3/1 ARMs. For 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 usually best for borrowers who expect to move in three or five years. These types of adjustable rate programs most benefit borrowers who will sell their house or refinance before the loan adjusts.
You might choose an ARM to get a very low initial interest rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. ARMs can be risky when housing prices go down because homeowners could be 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 (773) 774-9040 Ext 121. It's our job to answer these questions and many others, so we're happy to help!