Adjustable versus fixed rate loans
A fixed-rate loan features a fixed payment amount for the entire duration of the loan. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally payments on your fixed-rate loan will be very stable.
Your first few years of payments on a fixed-rate loan go mostly toward interest. As you pay , more of your payment is applied to principal.
You can choose a fixed-rate loan to lock in a low interest rate. Borrowers select fixed-rate loans when interest rates are low and they want to lock in this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at a favorable rate. Call Hawk Mortgage Group at (443) 619-7900 for details.
Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs usually adjust twice a year, based on various indexes.
The majority of Adjustable Rate Mortgages feature this cap, so they won't increase above a specified amount in a given period of time. Some ARMs can't increase more than 2% per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount the payment can go up in one period. In addition, the great majority of ARM programs have a "lifetime cap" — the rate can't ever exceed the capped amount.
ARMs usually start at a very low rate that may increase as the loan ages. You've probably read about 5/1 or 3/1 ARMs. In these loans, the initial rate is set for three or five years. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust. These loans are often best for borrowers who expect to move within three or five years. These types of adjustable rate loans most benefit borrowers who will move before the loan adjusts.
Most people who choose ARMs choose them when they want to take advantage of lower introductory rates and don't plan to stay in the house for any longer than the introductory low-rate period. ARMs are risky when property values decrease and borrowers can't sell their home or refinance their loan.
Have questions about mortgage loans? Call us at (443) 619-7900. We answer questions about different types of loans every day.