Differences between fixed and adjustable loans
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With a fixed-rate loan, your monthly payment doesn't change for the life of your mortgage. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance will go up over time, but in general, payment amounts on fixed rate loans don't increase much.
Early in a fixed-rate loan, most of your payment pays interest, and a much smaller part toward principal. That reverses itself as the loan ages.
You might choose a fixed-rate loan to lock in a low interest rate. Borrowers choose these types of loans when interest rates are low and they want to lock in the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at the best rate currently available. Call Dick Lepre at (415) 244-9383 to discuss your situation with one of our professionals.
There are many different kinds of Adjustable Rate Mortgages. ARMs are generally adjusted every six months, based on various indexes.
The majority of Adjustable Rate Mortgages feature this cap, so they can't increase over a specified amount in a given period. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which guarantees that your payment can't go above a fixed amount over the course of a given year. Almost all ARMs also cap your rate over the life of the loan.
ARMs most often feature the lowest, most attractive rates toward the start. They guarantee that rate from a month to ten years. You've probably heard of 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 kinds of loans are fixed for a certain number of years (3 or 5), then they adjust after the initial period. These loans are often best for borrowers who expect to move in three or five years. These types of adjustable rate loans benefit borrowers who will move before the initial lock expires.
You might choose an Adjustable Rate Mortgage to get a lower introductory interest rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky if property values decrease and borrowers cannot sell their home or refinance.
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