Adjustable versus fixed loans
A fixed-rate loan features a fixed payment amount for the entire duration of your mortgage. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally monthly payments for a fixed-rate loan will be very stable.
During the early amortization period of a fixed-rate loan, most of your monthly payment pays interest, and a much smaller percentage goes to principal. As you pay on the loan, more of your payment goes toward principal.
Borrowers 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 wish to lock in the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at a favorable rate. Call Churchill Mortgage Company at (703) 551-4107 to discuss your situation with one of our professionals.
There are many types of Adjustable Rate Mortgages. ARMs are generally adjusted every six months, based on various indexes.
The majority of ARMs are capped, which means they can't increase over a specific amount in a given period. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than two percent a year, even if the index the rate is based on goes up by more than two percent. Sometimes an ARM has a "payment cap" which guarantees that your payment won't increase beyond a fixed amount over the course of a given year. Most ARMs also cap your rate over the duration of the loan.
ARMs most often have their lowest, most attractive rates toward the beginning. They provide that interest rate for an initial period that varies greatly. You've probably heard of 5/1 or 3/1 ARMs. For these loans, the initial rate is set for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then adjust. Loans like this are best for people who anticipate moving 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 lower introductory interest rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs can be risky in a down market because homeowners could be stuck with increasing rates if they can't sell their home or refinance with a lower property value.
Have questions about mortgage loans? Call us at (703) 551-4107. We answer questions about different types of loans every day.