Fixed versus adjustable rate loans
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With a fixed-rate loan, your payment stays the same for the entire duration of your loan. The amount allocated to principal (the loan amount) will go up, however, your interest payment will go down accordingly. The property tax and homeowners insurance will increase over time, but in general, payments on these types of loans change little over the life of the loan.
At the beginning of a a fixed-rate loan, the majority your payment is applied to interest. As you pay on the loan, more of your payment goes toward principal.
Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. People choose fixed-rate loans because interest rates are low and they want to lock in this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call Inlet Mortgage Corporation at 561-792-4323 to learn more.
Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. ARMs usually adjust every six months, based on various indexes.
The majority of ARMs feature this cap, which means they won't go up over a specified amount in a given period. There may be a cap on interest rate variances over the course of a year. For example: no more than two percent per year, even though the underlying index goes up by more than two percent. Sometimes an ARM features a "payment cap" that ensures that 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 period.
ARMs usually start out at a very low rate that may increase over time. You've probably read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed 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 adjust. These loans are best for people who expect to move in three or five years. These types of ARMs benefit borrowers who will sell their house or refinance before the initial lock expires.
Most people who choose ARMs choose them because they want to take advantage of lower introductory rates and do not plan on remaining in the home for any longer than the initial low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates when they can't sell their home or refinance at the lower property value.
Have questions about mortgage loans? Call us at 561-792-4323. It's our job to answer these questions and many others, so we're happy to help!