Differences between adjustable and fixed loans
A fixed-rate loan features the same payment amount for the entire duration of the mortgage. The property tax and homeowners insurance will increase over time, but generally, payment amounts on fixed rate loans vary little.
Your first few years of payments on a fixed-rate loan are applied mostly to pay interest. As you pay , more of your payment is applied to principal.
Borrowers can choose a fixed-rate loan to lock in a low rate. People select these types of loans when interest rates are low and they wish to lock in at the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more 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 the best rate currently available. Call Forum Mortgage Bancorp at (773) 774-9040 Ext 121 to discuss your situation with one of our professionals.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. ARMs usually adjust every six months, based on various indexes.
Most ARM programs have a "cap" that protects you from sudden increases in monthly payments. Some ARMs can't increase more than 2% per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount that the monthly payment can increase in one period. In addition, almost all adjustable programs feature a "lifetime cap" — the interest rate can't ever exceed the capped percentage.
ARMs most often have the lowest, most attractive rates toward the beginning of the loan. They provide that interest rate from a month to ten years. You've probably read about 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. It then adjusts every year. These loans are fixed for a certain number of years (3 or 5), then adjust after the initial period. Loans like this are often best for people who anticipate moving within three or five years. These types of adjustable rate loans most benefit people who will sell their house or refinance before the loan adjusts.
Most people who choose ARMs choose them because they want to get lower introductory rates and do not plan to stay in the home longer than this initial low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up when they can't sell or refinance at the 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!