Differences between fixed and adjustable loans
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A fixed-rate loan features a fixed payment over the life of the mortgage. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part payments on your fixed-rate mortgage will increase very little.
Your first few years of payments on a fixed-rate loan go mostly to pay interest. As you pay on the loan, more of your payment is applied to principal.
You can choose a fixed-rate loan to lock in a low interest rate. Borrowers select these types of loans when interest rates are low and they want to lock in at this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at a favorable rate. Call Real Estate Loan 4 U at (408) 255-3978 to discuss how we can help.
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 increases in monthly payments. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount your monthly payment can go up in a given period. The majority of ARMs also cap your interest rate over the duration of the loan period.
ARMs usually start at a very low rate that may increase over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then adjust. These loans are often best for people who expect to move in three or five years. These types of adjustable rate loans benefit people who will sell their house or refinance before the loan adjusts.
Most people who choose ARMs do so because they want to get lower introductory rates and do not plan to remain in the house for any longer than the initial low-rate period. ARMs can be risky in a down market because homeowners could be stuck with increasing rates when they can't sell or refinance at the lower property value.
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