Differences between adjustable and fixed rate loans
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With a fixed-rate loan, your monthly payment never changes for the entire duration of your loan. The amount that goes for your principal (the actual loan amount) will go up, but the amount you pay in interest will go down in the same amount. The property taxes and homeowners insurance will increase over time, but in general, payment amounts on these types of loans don't increase much.
Your first few years of payments on a fixed-rate loan go primarily toward interest. The amount paid toward principal increases up slowly each month.
Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose fixed-rate loans because interest rates are low and they want to lock in at this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at a favorable rate. Call Myriad Services Home Loans, Inc. at 800-374-0046 for details.
Adjustable Rate Mortgages — ARMs, come in many varieties. ARMs usually adjust twice a year, based on various indexes.
Most programs have a cap that protects you from sudden monthly payment increases. There may be a cap on how much your interest rate can go up in one period. For example: no more than a couple percent a year, even if the index the rate is based on increases by more than two percent. 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" — this means that your interest rate will never exceed the capped percentage.
ARMs most often feature their lowest rates at the start. They usually provide the lower rate for an initial period that varies greatly. You've probably read about 5/1 or 3/1 ARMs. For these loans, the initial 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 usually best for borrowers who anticipate moving in three or five years. These types of adjustable rate loans most benefit borrowers who will sell their house or refinance before the initial lock expires.
You might choose an ARM to get a lower initial rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs are risky if property values decrease and borrowers can't sell their home or refinance.
