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 which are almost always part of the payment will go up over time, but for the most part, payments on fixed rate loans vary little.
When you first take out a fixed-rate loan, most of your payment is applied to interest. As you pay , more of your payment is applied to principal.
Borrowers can choose a fixed-rate loan to lock in a low rate. People select these types of loans when interest rates are low and they wish to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at a good rate. Call Liberty Mortgage at 281-542-7392 for details.
There are many types of Adjustable Rate Mortgages. ARMs are normally adjusted twice a year, based on various indexes.
The majority of ARMs are capped, which means they can't go up over a certain amount in a given period of time. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that ensures that your payment will not increase beyond a fixed amount in a given year. Most ARMs also cap your interest rate over the life of the loan period.
ARMs most often feature the lowest, most attractive rates toward the start. They usually provide the lower rate for an initial period that varies greatly. You've probably read about 5/1 or 3/1 ARMs. For these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These loans are fixed for a number of years (3 or 5), then they adjust. These loans are usually best for people who expect to move within three or five years. These types of adjustable rate programs benefit borrowers who will sell their house or refinance before the initial lock expires.
You might choose an Adjustable Rate Mortgage to take advantage of a very low initial interest rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs can be risky in a down market because homeowners could be stuck with increasing rates if they cannot sell or refinance at the lower property value.
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