Fixed versus adjustable loans
With a fixed-rate loan, your payment remains the same for the entire duration of your mortgage. The amount of the payment allocated to principal (the loan amount) will go up, however, your interest payment will decrease accordingly. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but in general, payments on fixed rate loans don't increase much.
At the beginning of a a fixed-rate loan, most of the payment is applied to interest. As you pay , more of your payment goes toward principal.
You might choose a fixed-rate loan in order to lock in a low rate. People choose fixed-rate loans when interest rates are low and they wish to lock in at the lower 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'll be glad to help you lock in a fixed-rate at the best rate currently available. Call Affinity Lending, Inc. at 816-554-9696 to discuss your situation with one of our professionals.
There are many different kinds of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.
The majority of ARMs are capped, which means they won't increase over a certain amount in a given period of time. There may be a cap on interest rate variances over the course of a year. For example: no more than two percent a year, even if the underlying index increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that the payment can increase in one period. In addition, almost all adjustable programs have a "lifetime cap" — the interest rate can't ever exceed the cap amount.
ARMs most often feature the lowest rates at the beginning. They usually provide the lower rate for an initial period that varies greatly. You've probably heard of 5/1 or 3/1 ARMs. In 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 they adjust after the initial period. These loans are often best for people who expect to move within three or five years. These types of adjustable rate programs most benefit people who plan to move before the initial lock expires.
You might choose an Adjustable Rate Mortgage to take advantage of a lower introductory rate and count on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky in a down market because homeowners could be stuck with increasing rates when they cannot sell their home or refinance with a lower property value.
Have questions about mortgage loans? Call us at 816-554-9696. It's our job to answer these questions and many others, so we're happy to help!