Fixed versus adjustable rate loans
With a fixed-rate loan, your monthly payment never changes for the life of the mortgage. The portion of the payment that goes to your principal (the amount you borrowed) will go up, however, the amount you pay in interest will go down accordingly. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally monthly payments on your fixed-rate loan will be very stable.
Early in a fixed-rate loan, a large percentage of your payment goes toward interest, and a much smaller part goes to principal. As you pay on the loan, more of your payment goes toward principal.
Borrowers can choose a fixed-rate loan in order to lock in a low rate. People choose fixed-rate loans when interest rates are low and they want to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at a favorable rate. Call Stepping Stone Mortgage at (541) 683-3300 to learn more.
Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs are generally adjusted every six months, based on various indexes.
The majority of Adjustable Rate Mortgages are capped, which means they won't go up above a specified amount in a given period of time. There may be a cap on how much your interest rate can go up in one period. For example: no more than two percent a year, even though the underlying index 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 your payment can go up in one period. Most ARMs also cap your rate over the life of the loan period.
ARMs most often feature the lowest rates toward the beginning of the loan. They usually guarantee that rate from a month to ten years. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then they adjust. These loans are best for borrowers who expect to move in three or five years. These types of adjustable rate loans are best for borrowers who plan to sell their house or refinance before the initial lock expires.
You might choose an ARM to take advantage of a very low introductory rate and count on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs can be risky in a down market because homeowners could be stuck with rates that go up when they cannot sell or refinance at the lower property value.
Have questions about mortgage loans? Call us at (541) 683-3300. We answer questions about different types of loans every day.