Adjustable versus fixed rate loans
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With a fixed-rate loan, your monthly payment never changes for the life of the mortgage. The longer you pay, the more of your payment goes toward principal. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally payments on your fixed-rate loan will be very stable.
Your first few years of payments on a fixed-rate loan go mostly to pay interest. That reverses as the loan ages.
Borrowers can choose a fixed-rate loan in order to lock in a low rate. Borrowers select these types of loans when interest rates are low and they wish to lock in the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at a favorable rate. Call Advanced Mortgage, Inc. at (972)991-0080 to discuss how we can help.
Adjustable Rate Mortgages — ARMs, come in many varieties. ARMs usually adjust every six months, based on various indexes.
Most ARM programs have a "cap" that protects borrowers from sudden monthly payment increases. 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 if the index the rate is based on increases by more than two percent. Sometimes an ARM has a "payment cap" which ensures your payment can't increase beyond a fixed amount in a given year. Most ARMs also cap your interest rate over the duration of the loan.
ARMs usually start at a very low rate that usually increases as the loan ages. You've likely read about 5/1 or 3/1 ARMs. In these loans, the introductory 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 after the initial period. Loans like this are best for people who expect to move in three or five years. These types of adjustable rate programs are best for people who plan to move before the initial lock expires.
Most people who choose ARMs choose them when they want to get lower introductory rates and don't plan to stay in the house for any longer than this introductory low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates if they can't sell or refinance with a lower property value.
Have questions about mortgage loans? Call us at (972)991-0080. We answer questions about different types of loans every day.