Fixed versus adjustable loans
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With a fixed-rate loan, your monthly payment stays the same for the life of the loan. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally payments on your fixed-rate loan will increase very little.
At the beginning of a a fixed-rate loan, the majority the payment goes toward interest. As you pay on the loan, more of your payment goes toward principal.
Borrowers can choose a fixed-rate loan to lock in a low interest rate. People choose fixed-rate loans when interest rates are low and they wish to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at the best rate currently available. Call Alerus Mortgage at (612) 386-5901 to learn more.
Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. ARMs are normally adjusted every six months, based on various indexes.
Most programs feature a cap that protects you from sudden increases in monthly payments. There may be a cap on how much your interest rate can increase in one period. For example: no more than two percent per year, even though the index the rate is based on increases by more than two percent. Sometimes an ARM has a "payment cap" which guarantees your payment can't increase beyond a fixed amount over the course of a given year. Almost all ARMs also cap your interest rate over the duration of the loan.
ARMs most often have their lowest, most attractive rates at the beginning. They usually provide that rate for an initial period that varies greatly. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the initial rate is set for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are usually best for borrowers who expect to move in three or five years. These types of adjustable rate programs benefit people who plan to move before the loan adjusts.
Most borrowers who choose ARMs choose them when they want to take advantage of lower introductory rates and do not plan on remaining in the house longer than the introductory low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates if they can't sell or refinance at the lower property value.
Have questions about mortgage loans? Call us at (612) 386-5901. It's our job to answer these questions and many others, so we're happy to help!