Fixed versus adjustable rate loans
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With a fixed-rate loan, your payment remains the same for the entire duration of the loan. The portion that goes to principal (the actual loan amount) will go up, but your interest payment will decrease accordingly. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part monthly payments on your fixed-rate mortgage will increase very little.
Early in a fixed-rate loan, a large percentage of your monthly payment goes toward interest, and a significantly smaller part toward principal. The amount applied to principal increases up gradually each month.
You can choose a fixed-rate loan 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. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at a favorable rate. Call Lonny Andrews at 916-821-7884 to learn more.
There are many different types of Adjustable Rate Mortgages. ARMs are normally adjusted twice a year, based on various indexes.
The majority of ARMs feature this cap, which means they won't increase above a specific amount in a given period. There may be a cap on how much your interest rate can go up in one period. For example: no more than two percent a 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. Almost all ARMs also cap your rate over the duration of the loan period.
ARMs usually start out at a very low rate that may increase over time. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set for three or five years. It then adjusts every year. These kinds of loans are fixed for a number of years (3 or 5), then adjust. These loans are best for people who expect to move in three or five years. These types of ARMs are best for borrowers who will sell their house or refinance before the initial lock expires.
You might choose an ARM to take advantage of a lower initial rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs can be risky in a down market because homeowners can get stuck with increasing rates if they cannot sell their home or refinance at the lower property value.
Have questions about mortgage loans? Call us at 916-821-7884. We answer questions about different types of loans every day.