Differences between fixed and adjustable rate loans
A fixed-rate loan features the same payment for the entire duration of your loan. The property taxes and homeowners insurance will go up over time, but generally, payment amounts on fixed rate loans change little over the life of the loan.
Your first few years of payments on a fixed-rate loan are applied mostly toward interest. The amount paid toward your principal amount goes up gradually each month.
Borrowers can choose a fixed-rate loan 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 lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at a favorable rate. Call Hawk Mortgage Group at (443) 619-7900 to discuss your situation with one of our professionals.
Adjustable Rate Mortgages — ARMs, come in many varieties. ARMs are generally adjusted twice a year, based on various indexes.
The majority of ARMs feature this cap, which means they can't go up above a certain amount in a given period. Some ARMs can't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which guarantees that your payment can't increase beyond a fixed amount in a given year. The majority of ARMs also cap your interest rate over the duration of the loan period.
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 set 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. Loans like this are usually best for people who anticipate moving in three or five years. These types of ARMs most benefit people who plan to sell their house or refinance before the initial lock expires.
You might choose an ARM to take advantage of a very low initial interest rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. ARMs can be risky if property values go down and borrowers cannot sell or refinance.
Have questions about mortgage loans? Call us at (443) 619-7900. We answer questions about different types of loans every day.