Differences between fixed and adjustable rate loans
A fixed-rate loan features a fixed payment over the life of the loan. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but for the most part, payment amounts on these types of loans don't increase much.
Early in a fixed-rate loan, most of your monthly payment pays interest, and a much smaller part goes to principal. As you pay on the loan, more of your payment goes toward principal.
Borrowers might choose a fixed-rate loan to lock in a low rate. Borrowers choose fixed-rate loans when interest rates are low and they wish to lock in this lower rate. For homeowners who have an ARM now, refinancing into 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 Churchill Mortgage Company at (703) 551-4107 to discuss how we can help.
There are many types of Adjustable Rate Mortgages. ARMs are normally adjusted every six months, based on various indexes.
Most ARMs are capped, which means they won't increase over a certain amount in a given period of time. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than two percent a year, even though the index the rate is based on goes up by more than two percent. Sometimes an ARM has a "payment cap" which guarantees your payment can't go above a fixed amount over the course of a given year. Almost all ARMs also cap your rate over the duration of the loan.
ARMs most often have the lowest, most attractive rates at the start of the loan. They guarantee that interest rate from a month to ten years. You've probably heard of 5/1 or 3/1 ARMs. For these loans, the initial 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 they adjust. These loans are often best for borrowers who expect to move within three or five years. These types of adjustable rate programs most benefit people who plan to move before the initial lock expires.
You might choose an Adjustable Rate Mortgage to take advantage of a very low initial rate and count on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky if property values go down and borrowers cannot sell their home or refinance their loan.
Have questions about mortgage loans? Call us at (703) 551-4107. We answer questions about different types of loans every day.