Fixed versus adjustable rate loans
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A fixed-rate loan features the same payment amount for the entire duration of the mortgage. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally payment amounts for your fixed-rate mortgage will increase very little.
At the beginning of a a fixed-rate mortgage loan, most of the payment goes toward interest. That gradually reverses as the loan ages.
Borrowers might choose a fixed-rate loan in order to lock in a low rate. People choose fixed-rate loans because interest rates are low and they wish to lock in the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call Prime Lenders Inc. at 9544866000 to learn more.
Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, the interest rates on ARMs are based on a federal index. A few of these are: the 6-month CD rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
The majority of Adjustable Rate Mortgages are capped, which means they can't go up over a specified amount in a given period of time. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than a couple percent per year, even though the underlying index increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that your payment can increase in one period. In addition, almost all adjustable programs feature a "lifetime cap" — your rate won't go over the capped amount.
ARMs most often have the lowest, most attractive rates at the start. They usually guarantee the lower interest rate from a month to ten years. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust. Loans like this are usually best for people who anticipate moving within three or five years. These types of adjustable rate programs most benefit borrowers who plan to sell their house or refinance before the loan adjusts.
Most people who choose ARMs do so when they want to take advantage of lower introductory rates and don't plan to stay in the home for any longer than this introductory low-rate period. ARMs can be risky when property values go down and borrowers are unable to sell or refinance.