Adjustable versus fixed rate loans
A fixed-rate loan features the same payment over the life of the mortgage. The property taxes and homeowners insurance will go up over time, but for the most part, payment amounts on these types of loans change little over the life of the loan.
At the beginning of a a fixed-rate mortgage loan, the majority the payment is applied to interest. As you pay on the loan, more of your payment is applied to principal.
Borrowers can choose a fixed-rate loan to lock in a low rate. People select these types of loans because interest rates are low and they wish to lock in at the 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 currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at a good rate. Call Executive Lending Group, LLC at 8165258000 to discuss your situation with one of our professionals.
There are many kinds of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.
Most ARM programs feature a cap that protects you from sudden increases in monthly payments. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than two percent per year, even if the underlying index increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that the monthly payment can go up in one period. The majority of ARMs also cap your interest rate over the life of the loan.
ARMs most often have their lowest rates at the beginning of the loan. They usually guarantee the lower interest rate for an initial period that varies greatly. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is set for three or five years. After this period it adjusts every year. These loans are fixed for a certain number of years (3 or 5), then they adjust after the initial period. Loans like this are best for people who expect to move in three or five years. These types of ARMs benefit people who plan to move before the loan adjusts.
You might choose an Adjustable Rate Mortgage to get a very low initial interest rate and count on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs are risky when property values go down and borrowers cannot sell their home or refinance their loan.
Have questions about mortgage loans? Call us at 8165258000. We answer questions about different types of loans every day.
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