Fixed versus adjustable rate loans
With a fixed-rate loan, your payment never changes for the entire duration of the loan. The amount of the payment allocated to principal (the loan amount) goes up, but the amount you pay in interest will go down in the same amount. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally payments on a fixed-rate loan will be very stable.
At the beginning of a a fixed-rate loan, most of the payment goes toward interest. As you pay on the loan, more of your payment is applied to principal.
You can choose a fixed-rate loan in order to lock in a low rate. People select these types of loans because interest rates are low and they wish to lock in at the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide 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 a favorable rate. Call Pacific Loan Brokers at 877-310-6200 to discuss your situation with one of our professionals.
There are many types of Adjustable Rate Mortgages. ARMs are normally adjusted every six months, based on various indexes.
Most programs have a "cap" that protects you from sudden monthly payment increases. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than a couple percent a year, even if the underlying index increases by more than two percent. Sometimes an ARM features a "payment cap" that guarantees your payment will not go above a certain amount in a given year. In addition, almost all ARM programs feature a "lifetime cap" — the interest rate can't ever go over the capped percentage.
ARMs most often have the lowest, most attractive rates toward the beginning. They usually provide the lower rate from a month to ten years. You've probably 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 a certain number of years (3 or 5), then they adjust. Loans like this are usually best for people who expect to move in three or five years. These types of ARMs are best for people who will move before the initial lock expires.
You might choose an ARM to get a very low introductory interest rate and count on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs can be risky in a down market because homeowners could be stuck with increasing rates if they cannot sell or refinance with a lower property value.
Have questions about mortgage loans? Call us at 877-310-6200. We answer questions about different types of loans every day.
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