Differences between fixed and adjustable rate loans
With a fixed-rate loan, your payment stays the same for the life of your mortgage. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but generally, payment amounts on fixed rate loans change little over the life of the loan.
During the early amortization period of a fixed-rate loan, most of your payment goes toward interest, and a significantly smaller percentage toward principal. The amount applied to your principal amount goes up slowly every month.
Borrowers might choose a fixed-rate loan to lock in a low interest rate. People choose these types of loans when interest rates are low and they want to lock in at the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at a favorable rate. Call Stepping Stone Mortgage at (541) 683-3300 to learn more.
There are many different kinds of Adjustable Rate Mortgages. ARMs are generally adjusted twice a year, based on various indexes.
Most ARMs feature this cap, which means they can't go up above a specific amount in a given period of time. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than two percent a year, even if the underlying index goes up by more than two percent. Sometimes an ARM has a "payment cap" that ensures that your payment will not increase beyond a fixed amount over the course of a given year. In addition, the great majority of ARMs have a "lifetime cap" — the rate can't exceed the cap percentage.
ARMs most often have their lowest, most attractive rates at the beginning of the loan. They usually provide the lower interest rate for an initial period that varies greatly. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for a certain number of years (3 or 5), then they adjust. Loans like this are best for borrowers who expect to move within three or five years. These types of ARMs most benefit people who plan to sell their house or refinance before the initial lock expires.
You might choose an ARM to get a very low initial interest rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs can be risky when property values go down and borrowers are unable to sell their home or refinance their loan.
Have questions about mortgage loans? Call us at (541) 683-3300. It's our job to answer these questions and many others, so we're happy to help!