With a fixed-rate loan, your payment stays the same for the entire duration of the mortgage. The amount of the payment that goes to principal (the loan amount) increases, but your interest payment will decrease accordingly. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally monthly payments for a fixed-rate loan will increase very little.
Your first few years of payments on a fixed-rate loan are applied mostly to pay interest. The amount applied to principal increases up slowly each month.
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 at this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at the best rate currently available. Call Net Equity Financial Mortgage at (215)741-3131 to discuss how we can help.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. ARMs are normally adjusted every six months, based on various indexes.
Most ARM programs have a "cap" that protects you from sudden monthly payment increases. Some ARMs can't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which ensures your payment can't go above a fixed amount over the course of a given year. Additionally, the great majority of ARM programs have a "lifetime cap" — this means that your rate will never go over the cap amount.
ARMs most often feature the lowest, most attractive rates toward the start. They guarantee that interest rate for an initial period that varies greatly. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the initial 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 adjust after the initial period. Loans like this are best for people who expect to move within three or five years. These types of ARMs most benefit borrowers who plan to move before the initial lock expires.
Most borrowers who choose ARMs choose them because they want to get lower introductory rates and do not plan to stay in the home longer than the initial low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates when they can't sell or refinance at the lower property value.