Differences between fixed and adjustable rate loans
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A fixed-rate loan features the same payment for the entire duration of the loan. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but in general, payments on fixed rate loans vary little.
When you first take out a fixed-rate loan, most of the payment is applied to interest. As you pay , more of your payment is applied to principal.
You might choose a fixed-rate loan in order to lock in a low rate. Borrowers select fixed-rate loans when interest rates are low and they wish to lock in at the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at a favorable rate. Call Opportunity Funding at (888) 833-5192 to discuss how we can help.
There are many types of Adjustable Rate Mortgages. ARMs are normally adjusted every six months, based on various indexes.
The majority of ARMs are capped, so they can't go up above a specified amount in a given period of time. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than two percent a year, even if the underlying index goes up by more than two percent. Sometimes an ARM has a "payment cap" that ensures that your payment will not increase beyond a fixed amount in a given year. Plus, the great majority of adjustable programs feature a "lifetime cap" — your rate can't ever exceed the capped percentage.
ARMs most often have their lowest, most attractive rates at the start. They provide that rate for an initial period that varies greatly. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is set 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 after the initial period. Loans like this are best for people who expect to move in three or five years. These types of adjustable rate programs most benefit people who will sell their house or refinance before the loan adjusts.
Most borrowers who choose ARMs do so because they want to take advantage of lower introductory rates and don't plan to remain in the house for any longer than the initial low-rate period. ARMs can be risky in a down market because homeowners can get stuck with rates that go up when they can't sell their home or refinance with a lower property value.
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