Differences between fixed and adjustable rate loans
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With a fixed-rate loan, your payment never changes for the entire duration of your loan. The amount of the payment that goes to your principal (the amount you borrowed) goes up, but your interest payment will go down in the same amount. The property tax and homeowners insurance will go up over time, but in general, payments on these types of loans don't increase much.
Your first few years of payments on a fixed-rate loan are applied mostly to pay interest. The amount applied to principal goes up gradually each month.
You might choose a fixed-rate loan in order to lock in a low interest rate. People select fixed-rate loans because interest rates are low and they wish to lock in at this low 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 help you lock in a fixed-rate at a good rate. Call Alternative Mortgage Group at 561-395-4264 to learn more.
There are many kinds of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.
Most Adjustable Rate Mortgages are capped, so they can't go up above a certain amount in a given period of time. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount the payment can increase in one period. Additionally, almost all ARM programs feature a "lifetime cap" — the interest rate can't ever go over the capped percentage.
ARMs most often have their lowest, most attractive rates at the beginning of the loan. They provide the lower rate for an initial period that varies greatly. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set for three or five years. It then adjusts every year. These kinds of loans are fixed for 3 or 5 years, then adjust. These loans are usually best for people who expect to move in three or five years. These types of adjustable rate loans benefit borrowers who will sell their house or refinance before the loan adjusts.
You might choose an Adjustable Rate Mortgage to get a very low introductory interest rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. ARMs are risky if property values decrease and borrowers are unable to sell their home or refinance their loan.
Have questions about mortgage loans? Call us at 561-395-4264. It's our job to answer these questions and many others, so we're happy to help!