Differences between adjustable and fixed loans
With a fixed-rate loan, your payment doesn't change for the life of your mortgage. The amount allocated to principal (the actual loan amount) will go up, but your interest payment will decrease accordingly. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally payment amounts for your fixed-rate loan will be very stable.
When you first take out a fixed-rate loan, the majority your payment goes toward interest. As you pay on the loan, more of your payment goes toward principal.
Borrowers might choose a fixed-rate loan to lock in a low rate. People select fixed-rate loans when interest rates are low and they wish to lock in this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at a favorable rate. Call Rasmussen Mortgage at 608-592-5600 for details.
There are many different kinds of Adjustable Rate Mortgages. ARMs are normally adjusted twice a year, based on various indexes.
The majority of ARMs are capped, which means they won't increase above a specified amount in a given period of time. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that guarantees your payment won't go above a certain amount in a given year. Most ARMs also cap your interest rate over the life of the loan period.
ARMs usually start out at a very low rate that usually increases over time. You've likely read about 5/1 or 3/1 ARMs. In these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These types of loans are fixed for a number of years (3 or 5), then adjust. These loans are often best for people who anticipate moving in three or five years. These types of adjustable rate loans benefit people who will sell their house or refinance before the initial lock expires.
You might choose an Adjustable Rate Mortgage to take advantage of a very low initial rate and count on moving, refinancing or simply 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 rates that go up when they cannot sell or refinance at the lower property value.
Have questions about mortgage loans? Call us at 608-592-5600. It's our job to answer these questions and many others, so we're happy to help!