November 17th, 2021 12:31 PM by Holly Ecimovic
What's the difference between an adjustable loan, and a fixed rate loan?
Here's some useful information on how each one differs and which one could be the best for you.
With a fixed-rate loan, the principal and interest portions of your payment do not change for the entire duration of your mortgage.
The longer you pay, the more of your payment goes toward principal. Your property taxes may go up (or rarely, down), and your insurance rates might vary, as well. But generally, payment amounts on your fixed-rate mortgage will increase very little.
When you first take out a fixed-rate loan, the majority of your payment is applied to interest. The amount paid toward your principal amount increases slowly each month.
You might choose a fixed-rate loan to lock in a low rate. People select fixed-rate loans when interest rates are low and they wish to lock in at the low rate.
For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater 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 Contemporary Mortgage Services, Inc. at 407-834-3377 to learn more.
Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. ARMs usually adjust twice a year, based on various indices.
Most ARMs are capped, so they won't go up over a certain amount in a given period of time. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than two percent per year, even if the index the rate is based on increases by more than two percent. Sometimes an ARM has a "payment cap" which ensures your payment won't go above a fixed amount in a given year. The majority of ARMs also cap your rate over the duration of the loan period.
ARMs most often feature the lowest, most attractive rates at the beginning of the loan. They provide that rate from a month to ten years. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is set for three or five years. It then adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust. Loans like this are usually best for borrowers who expect to move in three or five years. These types of adjustable rate loans benefit people who plan to sell their house or refinance before the loan adjusts.
Most borrowers who choose ARMs choose them when they want to take advantage of lower introductory rates and don't plan to remain in the home longer than this introductory low-rate period. ARMs can be risky in a down market because homeowners could be stuck with rates that go up if they can't sell or refinance with a lower property value.