Adjustable versus fixed loans
With a fixed-rate loan, your payment remains the same for the entire duration of the mortgage. The amount allocated for your principal (the actual loan amount) will increase, however, the amount you pay in interest will decrease in the same amount. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but for the most part, payment amounts on fixed rate loans vary little.
Your first few years of payments on a fixed-rate loan go primarily to pay interest. As you pay , more of your payment is applied to principal.
Borrowers might choose a fixed-rate loan in order to lock in a low rate. People select these types of loans when interest rates are low and they wish to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at a favorable rate. Call Forum Mortgage Bancorp at (773) 774-9040 Ext 121 to learn more.
Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. ARMs usually adjust twice a year, based on various indexes.
Most programs have a cap that protects you from sudden increases in monthly payments. 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 per year, even if the index the rate is based on increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that your monthly payment can go up in a given period. Additionally, almost all adjustable programs feature a "lifetime cap" — your interest rate can't ever go over the capped amount.
ARMs most often feature the lowest, most attractive rates at the start. They usually guarantee that interest rate for an initial period that varies greatly. You may hear people talking about "3/1 ARMs" or "5/1 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. These loans are usually best for borrowers who expect to move within three or five years. These types of ARMs are best for people who plan to sell their house or refinance before the loan adjusts.
You might choose an ARM to take advantage of a very low initial interest rate and plan on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs can be risky in a down market because homeowners can get stuck with increasing rates if they cannot sell 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!