Differences between adjustable and fixed rate loans
A fixed-rate loan features the same payment for the entire duration of your mortgage. The property tax and homeowners insurance will increase over time, but in general, payments on fixed rate loans don't increase much.
During the early amortization period of a fixed-rate loan, most of your monthly payment pays interest, and a much smaller part toward principal. As you pay on the loan, more of your payment is applied to principal.
You can choose a fixed-rate loan to lock in a low rate. People select these types of loans because interest rates are low and they wish 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 assist you in locking a fixed-rate at a favorable rate. Call Synergistic Wealth Management llc at 480-463-4357 for details.
There are many types of Adjustable Rate Mortgages. ARMs are generally adjusted every six months, based on various indexes.
Most ARM programs have a cap that protects you from sudden increases in monthly payments. Some ARMs can't increase 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 directly, caps the amount your payment can increase in a given period. Almost all ARMs also cap your interest rate over the life of the loan.
ARMs usually start out at a very low rate that may increase as the loan ages. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are best for people who anticipate moving within three or five years. These types of adjustable rate loans most benefit people who plan to sell their house or refinance before the loan adjusts.
You might choose an Adjustable Rate Mortgage to take advantage of a lower introductory interest rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates if they cannot sell or refinance with a lower property value.
Have questions about mortgage loans? Call us at 480-463-4357. We answer questions about different types of loans every day.