Adjustable versus fixed rate loans
With a fixed-rate loan, your payment doesn't change for the life of the mortgage. The longer you pay, the more of your payment goes toward principal. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally monthly payments on your fixed-rate loan will be very stable.
Your first few years of payments on a fixed-rate loan go primarily to pay interest. As you pay , more of your payment goes toward principal.
Borrowers might choose a fixed-rate loan in order to lock in a low rate. Borrowers choose fixed-rate loans when interest rates are low and they wish 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 currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at a good rate. Call Pinnacle Lending Group inc at 480-442-3949 to discuss how we can help.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. ARMs are generally adjusted every six months, based on various indexes.
The majority of Adjustable Rate Mortgages feature this cap, which means they won't increase above a certain amount in a given period of time. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than two percent a year, even if the underlying index increases by more than two percent. Sometimes an ARM has a "payment cap" that guarantees your payment won't go above a certain amount over the course of a given year. Most ARMs also cap your rate over the life of the loan.
ARMs usually start out at a very low rate that usually increases as the loan ages. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are often best for borrowers who expect to move within three or five years. These types of ARMs are best for people who plan to move before the loan adjusts.
You might choose an Adjustable Rate Mortgage to take advantage of a very low initial rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs are risky when property values go down and borrowers cannot sell their home or refinance.
Have questions about mortgage loans? Call us at 480-442-3949. It's our job to answer these questions and many others, so we're happy to help!