Differences between fixed and adjustable rate loans
A fixed-rate loan features the same payment for the entire duration of the loan. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part payments on a fixed-rate loan will increase very little.
Your first few years of payments on a fixed-rate loan go primarily to pay interest. The amount applied to principal increases up slowly each month.
You might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select fixed-rate loans because interest rates are low and they want to lock in at the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, 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 discuss how we can help.
There are many different kinds of Adjustable Rate Mortgages. ARMs are normally adjusted twice a year, based on various indexes.
The majority of ARMs feature this cap, so they won't increase over a certain amount in a given period. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. 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. The majority of ARMs also cap your interest rate over the life of the loan period.
ARMs usually start out at a very low rate that may increase over time. You've probably read about 5/1 or 3/1 ARMs. For 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 after the initial period. Loans like this are often best for people who expect to move in three or five years. These types of adjustable rate programs most benefit people who plan to move before the loan adjusts.
You might choose an Adjustable Rate Mortgage to get a very low initial rate and count on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs can be risky in a down market because homeowners could be stuck with rates that go up if they can't sell or refinance with a lower property value.
Have questions about mortgage loans? Call us at (773) 774-9040 Ext 121. We answer questions about different types of loans every day.