Differences between fixed and adjustable rate loans
A fixed-rate loan features the same payment amount for the entire duration of the loan. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but generally, payments 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 on the loan, more of your payment is applied to principal.
You can choose a fixed-rate loan in order to lock in a low rate. People choose fixed-rate loans when interest rates are low and they wish to lock in at the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at a good rate. Call AccessOne Mortgage at 919-787-6080 for details.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. ARMs usually adjust every six months, based on various indexes.
Most programs have a "cap" that protects you from sudden increases in monthly payments. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which guarantees your payment can't go above a fixed amount in a given year. Additionally, the great majority of ARMs feature a "lifetime cap" — your rate can't ever go over the capped percentage.
ARMs most often feature their lowest, most attractive rates at the start. They usually guarantee that 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 set for three or five years. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust. These loans are often best for borrowers who anticipate moving in three or five years. These types of adjustable rate loans are best for people who will sell their house or refinance before the loan adjusts.
Most borrowers who choose ARMs do so when they want to take advantage of lower introductory rates and do not plan on remaining in the home for any longer than the initial low-rate period. ARMs can be risky in a down market because homeowners could be stuck with rates that go up when they cannot sell their home or refinance at the lower property value.