Adjustable Versus Fixed Loans
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A fixed-rate loan features a fixed payment amount over the life of your mortgage. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but in general, payment amounts on fixed rate loans change little over the life of the loan.
When you first take out a fixed-rate mortgage loan, the majority your payment goes toward interest. The amount paid toward principal increases up slowly each month.
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 wish to lock in the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more stability 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.
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There are many types of Adjustable Rate Mortgages.
ARMs usually adjust twice a year, based on various indexes.
Most ARMs are capped, so they won't increase above a specific amount in a given period. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which guarantees that your payment won't go above a fixed amount in a given year. The majority of ARMs also cap your interest rate over the life of the loan.
ARMs most often have their lowest, most attractive rates at the beginning. They provide that rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These kinds 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 within three or five years. These types of ARMs most benefit borrowers who will sell their house or refinance before the initial lock expires.
You might choose an Adjustable Rate Mortgage to take advantage of a very low initial interest rate and count on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates if they cannot sell or refinance at the lower property value.