Adjustable versus fixed loans
A fixed-rate loan features the same payment over the life of the mortgage. The property tax and homeowners insurance will increase over time, but for the most part, payments on these types of loans don't increase much.
Your first few years of payments on a fixed-rate loan go mostly to pay interest. This proportion gradually reverses as the loan ages.
Borrowers can choose a fixed-rate loan in order to lock in a low rate. People select these types of loans because interest rates are low and they wish to lock in at this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater consistency 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 Stepping Stone Mortgage at (541) 683-3300 for details.
There are many different kinds of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.
Most ARMs feature this cap, so they can't increase above a specific amount in a given period of time. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which guarantees that your payment will not increase beyond a fixed amount over the course of a given year. Almost all ARMs also cap your rate over the duration of the loan period.
ARMs usually start out at a very low rate that may increase over time. 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. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then they adjust. These loans are often best for borrowers who expect to move in three or five years. These types of adjustable rate programs most benefit people who plan to sell their house or refinance before the loan adjusts.
You might choose an Adjustable Rate Mortgage to get a lower initial interest rate and count on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates if they can't sell or refinance at the 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!