Differences between adjustable and fixed rate loans
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With a fixed-rate loan, your monthly payment never changes for the life of your loan. The amount of the payment that goes for your principal (the amount you borrowed) increases, however, your interest payment will go down in the same amount. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but generally, payment amounts on these types of loans change little over the life of the loan.
Early in a fixed-rate loan, a large percentage of your payment pays interest, and a significantly smaller part goes to principal. As you pay , more of your payment goes toward principal.
You might choose a fixed-rate loan in order to lock in a low rate. People select fixed-rate loans because interest rates are low and they wish to lock in this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call Best Capital Funding at 909-358-4090 for details.
There are many types of Adjustable Rate Mortgages. ARMs are generally adjusted twice a year, based on various indexes.
Most ARM programs feature a "cap" that protects you from sudden monthly payment increases. Some ARMs can't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that guarantees your payment will not go above a fixed amount over the course of a given year. Additionally, the great majority of ARMs feature a "lifetime cap" — this means that your rate won't go over the capped percentage.
ARMs most often have their lowest rates at the beginning. They usually provide that rate from a month to ten years. You've likely read about 5/1 or 3/1 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 3 or 5 years, then adjust after the initial period. Loans like this are best for borrowers who anticipate moving in three or five years. These types of adjustable rate programs benefit people who plan to move before the loan adjusts.
Most people who choose ARMs do so when they want to take advantage of lower introductory rates and don't plan to remain in the home for any longer than the introductory low-rate period. ARMs are risky if property values decrease and borrowers can't sell or refinance.
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