Differences between adjustable and fixed rate loans
With a fixed-rate loan, your monthly payment doesn't change for the entire duration of the loan. The amount that goes for principal (the amount you borrowed) will increase, however, the amount you pay in interest will decrease in the same amount. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part payment amounts on a fixed-rate mortgage will increase very little.
Your first few years of payments on a fixed-rate loan go mostly to pay interest. As you pay , more of your payment goes toward principal.
Borrowers can choose a fixed-rate loan to lock in a low rate. People choose fixed-rate loans when interest rates are low and they wish to lock in at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more stability in monthly payments. 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 Prime Capital Mortgage Corp at 248-644-1200 to learn more.
There are many types of Adjustable Rate Mortgages. ARMs are normally adjusted every six months, based on various indexes.
The majority of ARMs are capped, which means they won't increase over a certain amount in a given period. Some ARMs can't adjust 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. Most ARMs also cap your rate over the life of the loan period.
ARMs usually start at a very low rate that may increase as the loan ages. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the initial rate is set for three or five years. It then adjusts every year. These loans are fixed for a certain number of years (3 or 5), then they adjust. Loans like this are usually best for people who expect to move within three or five years. These types of adjustable rate loans are best for people who plan to sell their house or refinance before the initial lock expires.
You might choose an ARM to get a very low initial interest rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs can be risky in a down market 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 248-644-1200. It's our job to answer these questions and many others, so we're happy to help!
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