Fixed versus adjustable loans
With a fixed-rate loan, your payment stays the same for the life of your mortgage. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but for the most part, payment amounts on these types of loans don't increase much.
When you first take out a fixed-rate loan, the majority the payment goes toward interest. That gradually reverses itself as the loan ages.
Borrowers might choose a fixed-rate loan in order to lock in a low rate. Borrowers choose fixed-rate loans when interest rates are low and they want to lock in at the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at a good rate. Call Executive Lending Group, LLC at 8165258000 to learn more.
Adjustable Rate Mortgages — ARMs, come in many varieties. ARMs are normally adjusted twice a year, 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 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which ensures that your payment can't increase beyond a certain amount over the course of a given year. Almost all ARMs also cap your interest rate over the duration of the loan.
ARMs most often have the lowest, most attractive rates toward the start of the loan. They usually provide the lower rate for an initial period that varies greatly. You've likely heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then adjust. These loans are best for people who anticipate moving in three or five years. These types of adjustable rate loans most benefit people who will move before the loan adjusts.
Most borrowers who choose ARMs do so because they want to get lower introductory rates and don't plan on staying in the house for any longer than the initial low-rate period. ARMs can be risky when property values go down and borrowers can't sell or refinance.
Have questions about mortgage loans? Call us at 8165258000. We answer questions about different types of loans every day.
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