Differences between adjustable and fixed loans
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A fixed-rate loan features the same payment amount for the entire duration of your mortgage. The property taxes and homeowners insurance will increase over time, but generally, payments on fixed rate loans vary little.
At the beginning of a a fixed-rate loan, the majority the payment is applied to interest. As you pay on the loan, more of your payment is applied to principal.
Borrowers might choose a fixed-rate loan to lock in a low rate. People select fixed-rate loans because interest rates are low and they wish to lock in the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at the best rate currently available. Call Founders Mortgage Inc at 405-418-8545 to discuss your situation with one of our professionals.
There are many kinds of Adjustable Rate Mortgages. ARMs are generally adjusted every six months, based on various indexes.
The majority of Adjustable Rate Mortgages are capped, which means they can't increase over a certain amount in a given period of time. 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 that your payment won't increase beyond a fixed amount over the course of a given year. Almost all ARMs also cap your rate over the life of the loan period.
ARMs usually start at a very low rate that usually increases as the loan ages. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for a certain number of years (3 or 5), then they adjust. These loans are often best for people who expect to move within three or five years. These types of ARMs benefit borrowers who will move before the initial lock expires.
Most borrowers who choose ARMs choose them when they want to take advantage of lower introductory rates and don't plan on remaining in the house for any longer than the introductory low-rate period. ARMs can be risky if property values decrease and borrowers are unable to sell or refinance their loan.
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