Differences between fixed and adjustable rate loans
With a fixed-rate loan, your monthly payment never changes for the life of the loan. The longer you pay, the more of your payment goes toward principal. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part monthly payments for your fixed-rate mortgage will increase very little.
During the early amortization period of a fixed-rate loan, a large percentage of your monthly payment goes toward interest, and a much smaller percentage toward principal. As you pay , more of your payment goes toward principal.
You can choose a fixed-rate loan to lock in a low interest rate. Borrowers choose these types of loans when 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 offer greater stability 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 Hawk Mortgage Group at (443) 619-7900 to learn more.
There are many different types of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.
Most Adjustable Rate Mortgages feature this cap, which means they can't go up above a specified amount in a given period. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than two percent per year, even if the underlying index increases by more than two percent. Sometimes an ARM has a "payment cap" that guarantees your payment can't increase beyond a certain amount in a given year. Almost all ARMs also cap your rate over the duration of the loan.
ARMs usually start at a very low rate that usually increases as the loan ages. You may have heard 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 kinds of loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are best for borrowers who expect to move 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.
Most borrowers who choose ARMs choose them when they want to take advantage of lower introductory rates and don't plan on remaining in the home longer than the introductory low-rate period. ARMs are risky when property values decrease and borrowers cannot sell their home or refinance their loan.
Have questions about mortgage loans? Call us at (443) 619-7900. It's our job to answer these questions and many others, so we're happy to help!