Differences between fixed and adjustable rate loans
With a fixed-rate loan, your monthly payment remains the same for the entire duration of your loan. The amount allocated to principal (the loan amount) goes up, but the amount you pay in interest will go down accordingly. The property taxes and homeowners insurance 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. The amount paid toward your principal amount increases up slowly each month.
You might choose a fixed-rate loan to lock in a low interest rate. People select these types of loans because interest rates are low and they want to lock in the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at a good rate. Call Homewood Mortgage, Inc. at 205-941-1484 for details.
There are many kinds of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.
Most programs have a cap that protects borrowers from sudden monthly payment increases. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that your payment can increase in a given period. Plus, almost all ARM programs feature a "lifetime cap" — the rate can never exceed the capped percentage.
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". In these loans, the initial rate is set for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust. Loans like this are best for borrowers who expect to move within three or five years. These types of adjustable rate loans benefit people who will move before the loan adjusts.
You might choose an Adjustable Rate Mortgage to take advantage of a lower introductory rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky if property values decrease and borrowers are unable to sell their home 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!