Differences between adjustable and fixed rate 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 tax and homeowners insurance will go up over time, but in general, payments on fixed rate loans change little over the life of the loan.
Your first few years of payments on a fixed-rate loan are applied primarily to pay interest. As you pay on the loan, more of your payment goes toward principal.
You might choose a fixed-rate loan to lock in a low rate. Borrowers choose these types of loans when interest rates are low and they want to lock in at the lower 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 can assist you in locking a fixed-rate at the best rate currently available. Call Acceptance Capital Mortgage Corporation at (337) 453-0012 to discuss how we can help.
Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. ARMs are generally adjusted twice a year, based on various indexes.
Most programs have a "cap" that protects borrowers from sudden increases in monthly payments. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than a couple percent a year, even though the index the rate is based on increases by more than two percent. Sometimes an ARM features a "payment cap" which guarantees your payment will not increase beyond a certain amount over the course of a given year. Plus, almost all ARM programs feature a "lifetime cap" — this means that the rate will never go over the cap percentage.
ARMs most often feature the lowest rates at the beginning of the loan. They provide the lower rate from a month to ten years. You've probably read about 5/1 or 3/1 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 adjust. These loans are best for borrowers who anticipate moving within three or five years. These types of adjustable rate loans most benefit people who plan to move before the loan adjusts.
Most people who choose ARMs choose them when they want to get lower introductory rates and don't plan to remain in the house for any longer than the initial low-rate period. ARMs can be risky if property values go down and borrowers are unable to sell or refinance their loan.
Have questions about mortgage loans? Call us at (337) 453-0012. It's our job to answer these questions and many others, so we're happy to help!