Adjustable versus fixed rate loans
With a fixed-rate loan, your monthly payment never changes for the entire duration of your loan. The amount of the payment that goes for principal (the amount you borrowed) increases, however, your interest payment will decrease accordingly. The property taxes and homeowners insurance will increase over time, but in general, payment amounts on fixed rate loans don't increase much.
During the early amortization period of a fixed-rate loan, a large percentage of your monthly payment pays interest, and a much smaller part toward principal. As you pay , more of your payment is applied to principal.
You might choose a fixed-rate loan in order to lock in a low interest rate. People choose fixed-rate loans because interest rates are low and they want to lock in at the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at a favorable rate. Call Churchill Mortgage Company at (703) 551-4107 for details.
There are many kinds of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.
Most ARM programs have a "cap" that protects borrowers from sudden increases in monthly payments. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that your payment can go up in a given period. The majority of ARMs also cap your rate over the duration of the loan.
ARMs usually start out at a very low rate that usually increases over time. You may have heard 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 best for borrowers who anticipate moving 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 people who choose ARMs choose them because they want to take advantage of lower introductory rates and don't plan on remaining in the home for any longer than this initial low-rate period. ARMs can be risky in a down market because homeowners could be stuck with rates that go up when they cannot sell their home or refinance with a lower property value.
Have questions about mortgage loans? Call us at (703) 551-4107. It's our job to answer these questions and many others, so we're happy to help!