Adjustable versus fixed rate loans
With a fixed-rate loan, your payment doesn't change for the life of your loan. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but generally, payment amounts on these types of loans vary little.
Your first few years of payments on a fixed-rate loan go mostly to pay interest. That gradually reverses as the loan ages.
Borrowers might choose a fixed-rate loan in order to lock in a low rate. Borrowers choose fixed-rate loans when interest rates are low and they wish to lock in at this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call Alerus Mortgage at 952 417 8481 to learn more.
There are many different kinds of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.
Most programs have a "cap" that protects you from sudden increases in monthly payments. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount your payment can go up in one period. In addition, almost all adjustable programs have a "lifetime cap" — the rate can't exceed the cap percentage.
ARMs most often feature their lowest rates toward the start of the loan. They provide that rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then they adjust. Loans like this are often best for people who anticipate moving within three or five years. These types of adjustable rate loans benefit people who plan to move before the initial lock expires.
You might choose an Adjustable Rate Mortgage to get a very low introductory rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs are risky if property values go down and borrowers cannot sell their home or refinance.
Have questions about mortgage loans? Call us at 952 417 8481. We answer questions about different types of loans every day.