Differences between adjustable and fixed rate loans
A fixed-rate loan features the same payment amount for the entire duration of the loan. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but in general, payments on these types of loans change little over the life of the loan.
At the beginning of a a fixed-rate mortgage loan, the majority your payment goes toward interest. The amount paid toward principal goes up slowly each month.
You might choose a fixed-rate loan to lock in a low rate. People choose these types of loans when interest rates are low and they wish to lock in at the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad 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 types of Adjustable Rate Mortgages. ARMs are generally adjusted twice a year, based on various indexes.
Most ARM programs have a "cap" that protects borrowers from sudden monthly payment increases. There may be a cap on how much your interest rate can go up in one period. For example: no more than two percent per year, even if the index the rate is based on increases by more than two percent. Sometimes an ARM has a "payment cap" which ensures your payment won't increase beyond a fixed amount in a given year. In addition, almost all adjustable programs have a "lifetime cap" — your rate can't exceed the cap amount.
ARMs most often feature the lowest rates at the start. They guarantee that 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 fixed for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust. Loans like this are often best for people who anticipate moving in three or five years. These types of adjustable rate loans most benefit borrowers who plan to move before the initial lock expires.
You might choose an Adjustable Rate Mortgage to get a lower introductory interest rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates when they cannot sell or refinance with a lower property value.
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!