Fixed versus adjustable loans
A fixed-rate loan features a fixed payment over the life of your mortgage. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. For the most part payments on a fixed-rate loan will be very stable.
During the early amortization period of a fixed-rate loan, a large percentage of your payment pays interest, and a significantly smaller part goes to principal. As you pay , more of your payment goes toward principal.
You might choose a fixed-rate loan in order to lock in a low rate. Borrowers choose 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 provide more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at a good rate. Call Alerus Mortgage at 952 417 8481 to discuss your situation with one of our professionals.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. ARMs usually adjust twice a year, based on various indexes.
The majority of Adjustable Rate Mortgages are capped, which means they can't go up over a specific amount in a given period. 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 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 directly, caps the amount that your monthly payment can go up in a given period. Almost all ARMs also cap your rate over the duration of the loan.
ARMs usually start at a very low rate that usually increases as the loan ages. You've likely read about 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 kinds of loans are fixed for a number of years (3 or 5), then they adjust. Loans like this are usually best for borrowers who anticipate moving in three or five years. These types of adjustable rate programs most benefit borrowers who plan to sell their house or refinance before the loan adjusts.
Most borrowers who choose ARMs do so because they want to get lower introductory rates and do not plan to stay in the house for any longer than this introductory low-rate period. ARMs are risky when property values go down and borrowers can't sell their home or refinance.
Have questions about mortgage loans? Call us at 952 417 8481. It's our job to answer these questions and many others, so we're happy to help!