Adjustable versus fixed rate loans
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With a fixed-rate loan, your monthly payment remains the same for the entire duration of your loan. The amount of the payment that goes to your principal (the loan amount) increases, however, the amount you pay in interest will go down in the same amount. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally payment amounts for a fixed-rate loan will increase very little.
Early in a fixed-rate loan, most of your payment pays interest, and a much smaller percentage goes to principal. The amount paid toward your principal amount increases up gradually every month.
Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. People select fixed-rate loans when interest rates are low and they want to lock in the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call House Loans Mortgage Services Corp at 877-696-4687 for details.
There are many kinds of Adjustable Rate Mortgages. Generally, the interest on ARMs are determined by an outside index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
The majority of Adjustable Rate Mortgages feature this cap, which means they can't increase over a specified amount in a given period. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than a couple percent per year, even though the index the rate is based on goes up by more than two percent. Sometimes an ARM features a "payment cap" which guarantees your payment will not increase beyond a certain amount over the course of a given year. The majority of ARMs also cap your interest rate over the duration of the loan.
ARMs usually start out at a very low rate that may increase as the loan ages. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then they adjust. These loans are best for people who anticipate moving in three or five years. These types of ARMs benefit borrowers who plan to sell their house or refinance before the loan adjusts.
Most borrowers who choose ARMs do so because they want to take advantage of lower introductory rates and don't plan on staying in the home for any longer than the introductory low-rate period. ARMs are risky when property values decrease and borrowers can't sell their home or refinance their loan.
Have questions about mortgage loans? Call us at 877-696-4687. We answer questions about different types of loans every day.