Differences between adjustable and fixed rate loans
A fixed-rate loan features the same payment for the entire duration of your loan. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part monthly payments for your fixed-rate loan will be very stable.
When you first take out a fixed-rate loan, the majority the payment goes toward interest. The amount paid toward principal increases up gradually every month.
Borrowers can choose a fixed-rate loan to lock in a low interest rate. Borrowers choose these types of loans because interest rates are low and they wish to lock in at this 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 how we can help.
There are many types of Adjustable Rate Mortgages. ARMs are normally adjusted every six months, based on various indexes.
Most ARMs feature this cap, so they won't go up above a certain amount in a given period. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that ensures that your payment can't go above a fixed amount in a given year. Additionally, the great majority of ARM programs feature a "lifetime cap" — this means that your interest rate can't exceed the capped amount.
ARMs usually start out at a very low rate that may increase over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for a certain number of years (3 or 5), then they adjust after the initial period. These loans are best for people who expect to move within three or five years. These types of ARMs most benefit borrowers who plan to move before the loan adjusts.
You might choose an ARM to get a lower introductory interest rate and count on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates if 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!