Fixed versus adjustable loans
A fixed-rate loan features a fixed payment for the entire duration of the loan. The property taxes and homeowners insurance will go up over time, but in general, payment amounts on these types of loans vary little.
When you first take out a fixed-rate loan, the majority the payment goes toward interest. This proportion gradually reverses itself as the loan ages.
You can choose a fixed-rate loan in order to lock in a low rate. People choose fixed-rate loans because interest rates are low and they want to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at a favorable rate. Call Prime Capital Mortgage Corp at 248-644-1200 to learn more.
Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. ARMs are normally adjusted every six months, based on various indexes.
The majority of ARMs are capped, so they can't go up above a specified amount in a given period of time. Some ARMs can't adjust more than two percent 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 your monthly payment can increase in a given period. Plus, the great majority of ARM programs have a "lifetime cap" — this means that your interest rate will never exceed the cap percentage.
ARMs most often feature the lowest rates at the beginning of the loan. They guarantee that interest rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust. These loans are usually best for borrowers who expect to move within three or five years. These types of adjustable rate loans most benefit borrowers who plan to sell their house or refinance before the initial lock expires.
You might choose an Adjustable Rate Mortgage to take advantage of a very low initial interest rate and count on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs can be risky when property values decrease and borrowers can't sell or refinance.
Have questions about mortgage loans? Call us at 248-644-1200. It's our job to answer these questions and many others, so we're happy to help!
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