Differences between fixed and adjustable rate loans
With a fixed-rate loan, your payment doesn't change for the entire duration of your mortgage. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance will go up over time, but generally, payment amounts on these types of loans change little over the life of the loan.
When you first take out a fixed-rate mortgage loan, most of your payment is applied to interest. As you pay on the loan, more of your payment goes toward principal.
Borrowers can choose a fixed-rate loan to lock in a low rate. Borrowers choose these types of loans when interest rates are low and they want to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at the best rate currently available. Call Forum Mortgage Bancorp at (773) 774-9040 Ext 121 to discuss your situation with one of our professionals.
There are many different kinds of Adjustable Rate Mortgages. ARMs are normally adjusted twice a year, based on various indexes.
Most Adjustable Rate Mortgages are capped, which means they can't go up above a specific amount in a given period. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than two percent a year, even if the index the rate is based on goes up by more than two percent. Sometimes an ARM has a "payment cap" that ensures your payment won't increase beyond a certain amount in a given year. Plus, the great majority of ARM programs have a "lifetime cap" — the rate won't exceed the cap percentage.
ARMs usually start out at a very low rate that usually increases as the loan ages. You've probably read about 5/1 or 3/1 ARMs. In these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust after the initial period. Loans like this are often best for borrowers who expect to move in three or five years. These types of adjustable rate programs are best for people who will move before the loan adjusts.
Most people who choose ARMs do so because they want to take advantage of lower introductory rates and do not plan on remaining in the home longer than the initial low-rate period. ARMs can be risky when property values decrease and borrowers cannot sell or refinance their loan.
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!