Fixed versus adjustable rate loans
With a fixed-rate loan, your payment stays the same for the entire duration of the loan. The amount of the payment that goes for principal (the amount you borrowed) will increase, but your interest payment will go down accordingly. The property tax and homeowners insurance will increase over time, but generally, payments on fixed rate loans don't increase much.
Your first few years of payments on a fixed-rate loan are applied mostly toward interest. The amount applied to your principal amount increases up gradually every month.
You can choose a fixed-rate loan to lock in a low rate. People choose these types of loans when interest rates are low and they want to lock in this lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at a favorable rate. Call Cornerstone Home Mortgage at 360-570-0106 to discuss your situation with one of our professionals.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. ARMs usually adjust twice a year, based on various indexes.
The majority of Adjustable Rate Mortgages are capped, which means they won't increase over a specific amount in a given period of time. There may be a cap on interest rate variances over the course of a year. For example: no more than two percent per year, even though the index the rate is based on increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that the payment can increase in one period. Additionally, almost all adjustable programs have a "lifetime cap" — this cap means that your rate won't exceed the cap percentage.
ARMs usually start at a very low rate that may increase as the loan ages. You've likely read about 5/1 or 3/1 ARMs. For 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 certain number of years (3 or 5), then they adjust. These loans are often best for people who anticipate moving within three or five years. These types of adjustable rate programs are best for people who will sell their house or refinance before the initial lock expires.
Most people who choose ARMs choose them because they want to get lower introductory rates and don't plan to remain in the house for any longer than the introductory low-rate period. ARMs can be risky in a down market because homeowners can get stuck with increasing rates if they cannot sell or refinance at the lower property value.
Have questions about mortgage loans? Call us at 360-570-0106. We answer questions about different types of loans every day.