Differences between fixed and adjustable loans
A fixed-rate loan features a fixed payment amount over the life of the mortgage. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally payment amounts for your fixed-rate mortgage will be very stable.
During the early amortization period of a fixed-rate loan, most of your monthly payment pays interest, and a much smaller part toward principal. That reverses as the loan ages.
You might choose a fixed-rate loan in order to lock in a low rate. People choose these types of loans when interest rates are low and they wish to lock in this lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater consistency 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 AccessOne Mortgage at 919-787-6080 to discuss your situation with one of our professionals.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. ARMs are generally adjusted every six months, based on various indexes.
Most ARM programs have a cap that protects you from sudden monthly payment increases. There may be a cap on how much your interest rate can increase in one period. For example: no more than a couple percent a year, even if the underlying index goes up by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount the monthly payment can increase in a given period. The majority of ARMs also cap your rate over the life of the loan.
ARMs most often feature their lowest, most attractive rates toward the beginning. They usually guarantee the lower interest rate from a month to ten years. You've probably heard of 5/1 or 3/1 ARMs. For these loans, the introductory rate is set for three or five years. It then adjusts every year. These types of loans are fixed for a number of years (3 or 5), then adjust after the initial period. Loans like this are best for borrowers who anticipate moving in three or five years. These types of adjustable rate programs most benefit borrowers who plan to sell their house or refinance before the initial lock expires.
Most people who choose ARMs choose them when they want to get lower introductory rates and do not plan to remain in the house for any longer than the initial low-rate period. ARMs can be risky if property values decrease and borrowers cannot sell their home or refinance.