Fixed versus adjustable loans
With a fixed-rate loan, your monthly payment never changes for the life of your mortgage. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance will increase over time, but in general, payments on fixed rate loans vary little.
Your first few years of payments on a fixed-rate loan go primarily toward interest. As you pay , more of your payment goes toward principal.
You might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select these types of loans when interest rates are low and they want to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at the best rate currently available. Call Hawk Mortgage Group at (443) 619-7900 to discuss how we can help.
Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs usually adjust every six months, based on various indexes.
Most ARMs feature this cap, which means they can't increase above a specified amount in a given period. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount that the monthly payment can increase in one period. Most ARMs also cap your rate over the life of the loan.
ARMs usually start out at a very low rate that usually increases over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set for three or five years. It then 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 anticipate moving in three or five years. These types of adjustable rate programs 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 plan on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs can be risky in a down market because homeowners can get stuck with rates that go up when they can't sell or refinance at the lower property value.
Have questions about mortgage loans? Call us at (443) 619-7900. We answer questions about different types of loans every day.