Differences between adjustable and fixed rate loans
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With a fixed-rate loan, your monthly payment never changes for the entire duration of your loan. 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. For the most part monthly payments for a fixed-rate mortgage will be very stable.
At the beginning of a a fixed-rate mortgage loan, most of your payment goes toward interest. This proportion reverses as the loan ages.
You can 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 low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at a favorable rate. Call Accelerated Lending Group at 661-489-LEND (5363) to discuss your situation with one of our professionals.
There are many different types of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.
Most programs have a cap that protects borrowers from sudden increases in monthly payments. Some ARMs can't increase more than two percent per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount that the payment can go up in one period. Plus, almost all ARM programs have a "lifetime cap" — your rate can never go over the capped percentage.
ARMs most often have their lowest rates toward the beginning of the loan. They guarantee the lower rate for an initial period that varies greatly. You've likely read about 5/1 or 3/1 ARMs. For these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are best for borrowers who expect to move in three or five years. These types of adjustable rate loans benefit borrowers who plan to move before the loan adjusts.
Most people who choose ARMs do so because they want to take advantage of lower introductory rates and don't plan to remain in the house for any longer than this initial low-rate period. ARMs are risky if property values decrease and borrowers cannot sell their home or refinance their loan.
Have questions about mortgage loans? Call us at 661-489-LEND (5363). It's our job to answer these questions and many others, so we're happy to help!