Adjustable versus fixed rate loans
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A fixed-rate loan features a fixed payment for the entire duration of the loan. The property tax and homeowners insurance will increase over time, but for the most part, payments on fixed rate loans don't increase much.
During the early amortization period of a fixed-rate loan, most of your payment pays interest, and a much smaller percentage toward principal. That gradually reverses itself as the loan ages.
You might choose a fixed-rate loan to lock in a low interest rate. Borrowers select these types of loans because interest rates are low and they want to lock in at the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at a good rate. Call TriStone Financial LLC at (678) 336-5200 to discuss how we can help.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. ARMs are normally adjusted twice a year, based on various indexes.
Most Adjustable Rate Mortgages are capped, which means they won't go up above a specified amount in a given period of time. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than two percent per year, even though the underlying index increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount your payment can increase in one period. In addition, almost all ARMs have a "lifetime cap" — this means that the rate can't exceed the cap percentage.
ARMs usually start at a very low rate that may increase as the loan ages. 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 3 or 5 years, then they adjust. Loans like this are often best for people who expect to move in three or five years. These types of ARMs most benefit people who plan to sell their house or refinance before the loan adjusts.
Most borrowers who choose ARMs choose them because they want to get lower introductory rates and do not plan to stay in the home for any longer than the introductory low-rate period. ARMs can be risky when property values decrease and borrowers can't sell or refinance.
Have questions about mortgage loans? Call us at (678) 336-5200. We answer questions about different types of loans every day.