Differences between fixed and adjustable loans
A fixed-rate loan features a fixed payment over the life of your loan. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but in general, payment amounts on these types of loans don't increase much.
When you first take out a fixed-rate mortgage loan, most of the payment goes toward interest. That gradually reverses as the loan ages.
You might choose a fixed-rate loan in order to lock in a low interest rate. People select fixed-rate loans when interest rates are low and they want to lock in this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking 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 usually adjust twice a year, based on various indexes.
Most programs feature a cap that protects you from sudden monthly payment increases. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which ensures your payment will not go above a certain amount over the course of a given year. Most ARMs also cap your interest rate over the duration of the loan period.
ARMs most often have their lowest, most attractive rates toward the start. They usually provide the lower interest rate from a month to ten years. You've likely heard of 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 loans are fixed for a certain number of years (3 or 5), then they adjust after the initial period. These loans are often best for borrowers who expect to move within three or five years. These types of adjustable rate loans benefit borrowers who plan to move before the initial lock expires.
Most borrowers who choose ARMs choose them when they want to take advantage of lower introductory rates and do not plan to remain in the home longer than this introductory low-rate period. ARMs can be risky if property values decrease and borrowers can't sell their home or refinance their loan.
Have questions about mortgage loans? Call us at 952 417 8481. We answer questions about different types of loans every day.