Differences between fixed and adjustable loans
A fixed-rate loan features the same payment over the life of the mortgage. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but in general, payments on these types of loans change little over the life of the loan.
Early in a fixed-rate loan, most of your monthly payment pays interest, and a much smaller part toward principal. The amount applied to your principal amount increases up slowly every month.
Borrowers might choose a fixed-rate loan to lock in a low rate. People select these types of loans when interest rates are low and they want to lock in this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at a favorable rate. Call Alerus Mortgage at 952 417 8481 to discuss your situation with one of our professionals.
There are many kinds of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.
Most ARM programs feature a "cap" that protects you from sudden increases in monthly payments. There may be a cap on interest rate variances over the course of a year. For example: no more than two percent per year, even if the index the rate is based on goes up by more than two percent. Sometimes an ARM has a "payment cap" which ensures that your payment will not increase beyond a certain amount in a given year. Additionally, almost all ARM programs feature a "lifetime cap" — this means that the rate can never go over the capped percentage.
ARMs most often feature the lowest rates at the start of the loan. They guarantee that interest rate from a month to ten years. You may have heard 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 kinds of loans are fixed for a certain number of years (3 or 5), then adjust. Loans like this are best for borrowers who expect to move in three or five years. These types of ARMs benefit people who will move before the initial lock expires.
You might choose an ARM to get a very low initial rate and count on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs can be risky when property values decrease and borrowers are unable to sell their home or refinance their loan.
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!