Fixed versus adjustable rate loans
With a fixed-rate loan, your payment never changes for the entire duration of your mortgage. The amount of the payment that goes for your principal (the amount you borrowed) increases, but the amount you pay in interest will decrease accordingly. The property taxes and homeowners insurance 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 are applied primarily toward interest. This proportion reverses itself as the loan ages.
Borrowers can choose a fixed-rate loan to lock in a low rate. People select fixed-rate loans because interest rates are low and they wish to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide 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 discuss how we can help.
Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. ARMs usually adjust twice a year, based on various indexes.
Most programs feature a "cap" that protects you from sudden increases in monthly payments. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than a couple percent per year, even though the underlying index goes up by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount the payment can go up in a given period. The majority of ARMs also cap your rate over the duration of the loan period.
ARMs most often have their lowest rates at the start. They usually guarantee the lower rate from a month to ten years. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is set for three or five years. After this period it adjusts every year. These kinds of loans are fixed for a certain number of years (3 or 5), then they adjust after the initial period. Loans like this are usually best for people who expect to move in three or five years. These types of adjustable rate programs are best for borrowers who plan to move before the loan adjusts.
Most people who choose ARMs do so when they want to get lower introductory rates and do not plan on remaining in the house for any longer than the initial low-rate period. ARMs are risky if property values decrease and borrowers are unable to sell 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!