Differences between adjustable and fixed loans
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With a fixed-rate loan, your payment never changes for the entire duration of the loan. The amount that goes for your principal (the loan amount) increases, however, the amount you pay in interest will decrease in the same amount. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but generally, payment amounts on these types of loans don't increase much.
At the beginning of a a fixed-rate loan, most of your payment goes toward interest. The amount applied to principal increases up gradually each month.
You might choose a fixed-rate loan to lock in a low rate. Borrowers choose fixed-rate loans when interest rates are low and they wish to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at the best rate currently available. Call The Ross Fund at (949) 533-5311 to discuss how we can help.
There are many different kinds of Adjustable Rate Mortgages. ARMs are generally adjusted every six months, based on various indexes.
Most programs feature a "cap" that protects you from sudden increases in monthly payments. 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 monthly payment can increase in one period. Additionally, almost all ARM programs have a "lifetime cap" — the rate won't go over the capped percentage.
ARMs most often have the lowest, most attractive rates toward the beginning. They usually guarantee the lower rate from a month to ten years. 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 types of loans are fixed for 3 or 5 years, then they adjust. These loans are usually best for borrowers who expect to move in three or five years. These types of ARMs benefit people who will sell their house or refinance before the initial lock expires.
You might choose an ARM to take advantage of a lower introductory interest rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. ARMs can be risky in a down market because homeowners can get stuck with rates that go up if they can't sell or refinance at the lower property value.
Have questions about mortgage loans? Call us at (949) 533-5311. It's our job to answer these questions and many others, so we're happy to help!