Differences between adjustable and fixed rate loans
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With a fixed-rate loan, your payment doesn't change for the entire duration of your mortgage. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part payments for your fixed-rate mortgage will increase very little.
When you first take out a fixed-rate loan, the majority your payment goes toward interest. As you pay on the loan, more of your payment is applied to principal.
Borrowers might choose a fixed-rate loan to lock in a low interest rate. People choose these types of loans when interest rates are low and they wish to lock in the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call Award Mortgage Group at 619-857-2273 to discuss your situation with one of our professionals.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. ARMs usually adjust twice a year, based on various indexes.
The majority of Adjustable Rate Mortgages are capped, which means they won't increase over a specified amount in a given period of time. Some ARMs can't increase more than 2% 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. In addition, the great majority of adjustable programs feature a "lifetime cap" — this means that the interest rate can't go over the capped percentage.
ARMs usually start out at a very low rate that usually increases over time. 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 a number of years (3 or 5), then adjust. Loans like this are usually best for people who anticipate moving in three or five years. These types of adjustable rate programs are best for people who plan to move before the loan adjusts.
Most borrowers who choose ARMs do so when they want to get lower introductory rates and don't plan on remaining in the house longer than this introductory low-rate period. ARMs can be risky in a down market because homeowners can get stuck with increasing rates when they can't sell their home or refinance with a lower property value.
Have questions about mortgage loans? Call us at 619-857-2273. We answer questions about different types of loans every day.