Differences between adjustable and fixed rate loans
A fixed-rate - loan features a fixed payment amount 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 payment amounts for your fixed-rate mortgage will be very stable.
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During the early amortization period of a fixed-rate loan, a large percentage of your payment goes toward interest, and a much smaller percentage toward principal. As your loan ages, more of your payment goes toward principal.
Borrowers can choose a fixed-rate loan in order to lock in a low interest rate for the life of the loan.. People choose these types of loans when interest rates are low and they want to lock in at the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking in a fixed-rate mortgage at a great rate. Call Asset Alliance Mortgage at (760) 632-7701 to discuss your situation with one of our professionals.
Adjustable Rate Mortgages - ARMs, come in a great number of varieties. Generally, interest rates for ARMs are determined by an outside index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, one-year Treasury Security rate, Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), as well as several others.
Most ARMs are capped, so they can't go up over a specific amount in a given period. There may be a cap on how much your interest rate can go up in a one year period. For example: no more than two percent per year, even though the indexed rate have got up by more than two percent. The majority of ARMs also cap your interest rate over the duration of the loan period (5% Lifetime Cap over start rate).
ARMs usually start at a very low rate that usually increases as the loan ages. You may have heard of "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is fixed for three or five years. After this period the rate adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust. Loans like these are usually best for borrowers who anticipate moving within three or five years. These types of adjustable rate loans are best for people who plan to move before the initial lock expires or will have scheduled increases income.
Most people who choose ARMs choose them because they want to take advantage of lower introductory rates and do not plan on staying in the house longer than the introductory low-rate period. ARMs can be risky in a down market because homeowners could be stuck with increasing rates and can't sell or refinance at the lower property values.
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