Differences between fixed and adjustable loans
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With a fixed-rate loan, your monthly payment never changes for the life of the 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 payments for your fixed-rate loan will increase very little.
Your first few years of payments on a fixed-rate loan go mostly toward interest. The amount paid toward principal goes up slowly every month.
Borrowers can choose a fixed-rate loan in order to lock in a low rate. Borrowers choose fixed-rate loans because interest rates are low and they want to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call Dream Home Funding at (325) 651-2100 to discuss how we can help.
There are many different kinds of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.
Most programs feature a "cap" that protects borrowers from sudden monthly payment increases. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount the monthly payment can increase in a given period. Almost all ARMs also cap your interest rate over the duration of the loan.
ARMs usually start out at a very low rate that may increase over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is fixed for three or five years. It then adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust. These loans are often best for borrowers who anticipate moving in three or five years. These types of ARMs are best for people who plan to move before the initial lock expires.
Most people who choose ARMs choose them because they want to get lower introductory rates and don't plan on remaining in the house longer than the initial low-rate period. ARMs can be risky in a down market because homeowners could be stuck with increasing rates if they can't sell their home or refinance with a lower property value.
Have questions about mortgage loans? Call us at (325) 651-2100. It's our job to answer these questions and many others, so we're happy to help!