Differences between fixed and adjustable rate loans
With a fixed-rate loan, your payment stays the same for the entire duration of the loan. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance will go up over time, but generally, payment amounts on these types of loans vary little.
Early in a fixed-rate loan, most of your monthly payment pays interest, and a significantly smaller percentage goes to principal. This proportion reverses itself as the loan ages.
You can choose a fixed-rate loan to lock in a low rate. Borrowers select fixed-rate loans because interest rates are low and they wish to lock in the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater 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 Alliance Lending Services at 801.255.6582 for details.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. ARMs usually adjust twice a year, based on various indexes.
Most Adjustable Rate Mortgages are capped, which means they can't go up above a specified 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 features a "payment cap" which guarantees your payment won't go above a certain amount in a given year. The majority of ARMs also cap your rate over the life of the loan.
ARMs usually start at a very low rate that usually increases as the loan ages. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These types of loans are fixed for a number of years (3 or 5), then adjust after the initial period. These loans are often best for people who anticipate moving within three or five years. These types of adjustable rate programs benefit people who will move before the loan adjusts.
Most borrowers who choose ARMs choose them when they want to get lower introductory rates and don't plan to remain in the home longer than this introductory low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates when they can't sell or refinance with a lower property value.
Have questions about mortgage loans? Call us at 801.255.6582. It's our job to answer these questions and many others, so we're happy to help!