Differences between fixed and adjustable rate loans
A fixed-rate loan features a fixed payment for the entire duration of your loan. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but for the most part, payment amounts on these types of loans change little over the life of the loan.
During the early amortization period of a fixed-rate loan, most of your payment pays interest, and a much smaller percentage toward principal. The amount paid toward principal goes up gradually each month.
You can choose a fixed-rate loan in order to lock in a low interest rate. People choose these types of loans because interest rates are low and they wish to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we’d love to assist you in locking a fixed-rate at a good rate. Call Agape Mortgage at 661.324.2427 to learn more.
There are many types of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.
The majority of ARMs feature this cap, so they won’t increase over a certain amount in a given period of time. Some ARMs won’t increase more than two percent per year, regardless of the underlying interest rate. 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. In addition, almost all adjustable programs have a “lifetime cap” — your interest rate won’t go over the cap amount.
ARMs usually start at a very low rate that usually increases over time. You’ve probably heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These kinds of loans are fixed for a certain number of years (3 or 5), then they adjust. These loans are usually best for borrowers who expect to move within three or five years. These types of ARMs most benefit people who will sell their house or refinance before the initial lock expires.
Most borrowers who choose ARMs do so because they want to take advantage of lower introductory rates and do not plan to stay in the house longer than this introductory low-rate period. ARMs are risky if property values decrease and borrowers can’t sell their home or refinance.