Differences between adjustable and fixed rate loans
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With a fixed-rate loan, your payment never changes for the life of the mortgage. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance will increase over time, but for the most part, payments on fixed rate loans change little over the life of the loan.
Early in a fixed-rate loan, most of your payment pays interest, and a much smaller percentage goes to principal. The amount paid toward principal goes up gradually each month.
You might 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 this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at a good rate. Call RPM Mortgage, Inc. at (415) 244-9383 to learn more.
Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. ARMs are generally adjusted twice a year, based on various indexes.
Most ARMs feature this cap, so they can't go up above a specified amount in a given period. Some ARMs won't increase 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 that the monthly payment can go up in a given period. Almost all 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 as the loan ages. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are usually best for people who expect to move in three or five years. These types of adjustable rate programs most benefit borrowers who will sell their house or refinance before the loan adjusts.
You might choose an ARM 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 are unable to sell their home or refinance their loan.
Have questions about mortgage loans? Call us at (415) 244-9383. We answer questions about different types of loans every day.