Fixed versus adjustable rate loans
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A fixed-rate loan features a fixed payment amount over the life of the mortgage. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part payment amounts on your fixed-rate loan will be very stable.
Your first few years of payments on a fixed-rate loan go mostly toward interest. As you pay , more of your payment goes toward principal.
You might choose a fixed-rate loan to lock in a low rate. People choose these types of loans because interest rates are low and they wish to lock in at this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at the best rate currently available. Call 3 Reasons Home Loans at (661) 288-2987 for details.
There are many kinds of Adjustable Rate Mortgages. ARMs are generally adjusted twice a year, based on various indexes.
Most programs have a "cap" that protects you from sudden increases in monthly payments. There may be a cap on how much your interest rate can go up in one period. For example: no more than a couple percent per year, even if the index the rate is based on goes up 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 increase in one period. In addition, the great majority of ARM programs have a "lifetime cap" — the interest rate can't exceed the capped percentage.
ARMs usually start at a very low rate that may increase as the loan ages. You've likely read about 5/1 or 3/1 ARMs. In these loans, the initial rate is set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are best for people who anticipate moving within three or five years. These types of adjustable rate loans most benefit borrowers who plan to sell their house or refinance before the initial lock expires.
You might choose an Adjustable Rate Mortgage to get a very low introductory interest rate and plan on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs are risky if property values decrease and borrowers can't sell their home or refinance their loan.
Have questions about mortgage loans? Call us at (661) 288-2987. It's our job to answer these questions and many others, so we're happy to help!