Fixed versus adjustable rate loans
With a fixed-rate loan, your payment remains the same for the entire duration of your loan. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally payments for a fixed-rate loan will be very stable.
Your first few years of payments on a fixed-rate loan go primarily to pay interest. The amount paid toward your principal amount increases up slowly each month.
You can choose a fixed-rate loan in order to lock in a low interest rate. People 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 more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at the best rate currently available. Call Prime Capital Mortgage Corp at 248-644-1200 to discuss your situation with one of our professionals.
Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. ARMs are generally adjusted every six months, based on various indexes.
Most Adjustable Rate Mortgages are capped, so they can't go up above a certain amount in a given period. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that guarantees that your payment can't go above a certain amount over the course of a given year. In addition, the great majority of ARM programs have a "lifetime cap" — this means that your rate can't ever go over the cap percentage.
ARMs most often have the lowest, most attractive rates at the start of the loan. They guarantee that rate from a month to ten years. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust after the initial period. Loans like this are best for people who expect to move in three or five years. These types of adjustable rate loans are best for people who plan to move before the loan adjusts.
You might choose an ARM to get a lower initial interest rate and count on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates when they cannot sell or refinance at the lower property value.
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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