Differences between fixed and adjustable rate loans
A fixed-rate loan features the same payment over the life of the loan. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but generally, payment amounts on fixed rate loans don't increase much.
When you first take out a fixed-rate mortgage loan, the majority your payment is applied to interest. 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 interest rate. People choose these types of loans because interest rates are low and they want to lock in at this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at a good rate. Call Homewood Mortgage, Inc. at 205-941-1484 to learn more.
Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs are generally adjusted every six months, based on various indexes.
The majority of Adjustable Rate Mortgages feature this cap, so they can't go up over a specified amount in a given period of time. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than two percent per year, even if the underlying index goes up by more than two percent. Sometimes an ARM has a "payment cap" that guarantees that your payment will not go above a certain amount over the course of a given year. The majority of ARMs also cap your rate over the duration of the loan period.
ARMs usually start out at a very low rate that may increase as the loan ages. You've probably read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are best for people who expect to move within three or five years. These types of ARMs benefit people who plan to sell their house or refinance before the loan adjusts.
Most people who choose ARMs choose them when they want to get lower introductory rates and don't plan on staying in the home longer than the introductory low-rate period. ARMs can be risky if property values go down and borrowers are unable to sell or refinance their loan.
Have questions about mortgage loans? Call us at 205-941-1484. It's our job to answer these questions and many others, so we're happy to help!