Fixed versus adjustable rate loans
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With a fixed-rate loan, your monthly payment remains the same for the life of the loan. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally payments for a fixed-rate loan will be very stable.
Your first few years of payments on a fixed-rate loan go mostly to pay interest. This proportion gradually reverses as the loan ages.
You might choose a fixed-rate loan to lock in a low interest rate. Borrowers choose fixed-rate loans when interest rates are low and they wish to lock in the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at the best rate currently available. Call Mortgage Direct Inc. at 1-844-MBROKER (1-844-627-6537) to learn more.
There are many different types of Adjustable Rate Mortgages. Generally, interest rates for ARMs are determined by an outside index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most ARM programs feature a cap that protects borrowers from sudden monthly payment increases. 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 rate directly, caps the amount that the payment can go up in one period. Additionally, almost all ARM programs feature a "lifetime cap" — this means that your interest rate will never exceed the cap amount.
ARMs usually start out at a very low rate that usually increases over time. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are often best for borrowers who expect to move within three or five years. These types of adjustable rate loans are best for borrowers who will move before the initial lock expires.
Most people who choose ARMs do so when they want to get lower introductory rates and don't plan on staying in the home longer than this introductory low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up if they cannot sell their home or refinance with a lower property value.
Have questions about mortgage loans? Call us at 1-844-MBROKER (1-844-627-6537). We answer questions about different types of loans every day.