Differences between adjustable and fixed loans
A fixed-rate loan features the same payment amount over the life of the mortgage. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part monthly payments on your fixed-rate loan will be very stable.
Your first few years of payments on a fixed-rate loan go primarily to pay interest. The amount paid toward principal increases up gradually each month.
You can choose a fixed-rate loan in order to lock in a low interest rate. People choose fixed-rate loans because interest rates are low and they wish to lock in this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at a favorable rate. Call Alerus Mortgage at 952 417 8481 for details.
There are many different types of Adjustable Rate Mortgages. ARMs are normally adjusted twice a year, based on various indexes.
Most ARM programs feature a cap that protects borrowers from sudden increases in monthly payments. There may be a cap on interest rate increases over the course of a year. For example: no more than a couple percent a year, even though the index the rate is based on goes up by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount that the payment can increase in one period. Most ARMs also cap your rate over the duration of the loan.
ARMs most often feature their lowest, most attractive rates at the start. They usually provide the lower rate for an initial period that varies greatly. You've likely read about 5/1 or 3/1 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 3 or 5 years, then adjust. These loans are usually best for borrowers who expect to move within three or five years. These types of adjustable rate programs are best for borrowers who plan to sell their house or refinance before the initial lock expires.
Most people who choose ARMs choose them when they want to take advantage of lower introductory rates and don't plan to stay in the home longer than this initial low-rate period. ARMs are risky when property values go down and borrowers are unable to 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.