With a fixed-rate loan, your payment doesn’t change for the entire duration of the mortgage. The amount that goes to your principal (the amount you borrowed) will increase, but the amount you pay in interest will decrease accordingly.
Your first few years of payments on a fixed-rate loan go primarily to pay interest. The amount paid toward principal increases up slowly every month.
Borrowers can choose a fixed-rate loan to lock in a low rate. People 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 offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we’ll be glad to help you lock in a fixed-rate at a favorable rate.
Adjustable Rate Mortgages
ARMs, come in many varieties. ARMs are normally adjusted annually, based on various indexes.
The majority of ARMs feature this cap, which means they can’t go up over a specific amount in a given period. Some ARMs won’t increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a “payment cap” that ensures that your payment can’t go above a fixed amount in a given year. Almost all ARMs also cap your interest rate over the duration of the loan period.
ARMs most often have their lowest rates at the start. They usually guarantee the lower interest rate for an initial period that varies greatly. You may hear people talking about “3/1 ARMs” or “5/1 ARMs”. For these loans, the initial rate is set for three or five years. It then adjusts every year. These types of loans are fixed for a certain number of years (3 or 5), then adjust after the initial period. Loans like this are often best for people who anticipate moving within three or five years. These types of adjustable rate loans are best for borrowers who plan to sell their house or refinance before the loan adjusts.
Most people who choose ARMs choose them when they want to take advantage of lower introductory rates and do not plan to remain in the home for any longer than the initial low-rate period. ARMs are risky when property values decrease and borrowers cannot sell their home or refinance their loan.