Differences between adjustable and fixed loans
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With a fixed-rate loan, your payment doesn't change for the life of the mortgage. The amount that goes to principal (the amount you borrowed) will increase, however, the amount you pay in interest will go down in the same amount. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but generally, payment amounts on fixed rate loans vary little.
When you first take out a fixed-rate mortgage loan, most of your payment goes toward interest. As you pay , more of your payment goes toward principal.
Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose these types of loans because interest rates are low and they wish to lock in this low rate. For homeowners who have an ARM now, refinancing into 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 the best rate currently available. Call All Money.com Inc. at 415-731-3100 for details.
There are many kinds of Adjustable Rate Mortgages. ARMs are generally adjusted once a year, based on various indexes. However there are many loan programs that offer a Fixed Rate for a longer period of 5 years; 7 Years and 10 years in the initial loan term and there after the interest rate adjust annually to an index plus pre-determined margin.
Most programs feature a cap that protects you from sudden increases in monthly payments. Some ARMs won't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which guarantees your payment won't go above a fixed amount over the course of a given year. The majority of ARMs also cap your interest rate over the life of the loan.
ARMs usually start 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 adjust. Loans like this are often best for borrowers who anticipate moving in three or five years. These types of ARMs most benefit borrowers who plan to move before the initial lock expires.
Most people who choose ARMs do so when they want to take advantage of lower introductory rates and do not plan on remaining in the home longer than this introductory low-rate period. ARMs are risky when property values go down and borrowers can't sell their home or refinance their loan.