Differences between fixed and adjustable loans
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With a fixed-rate loan, your payment never changes for the entire duration of your mortgage. The amount of the payment that goes for your principal (the amount you borrowed) will increase, but the amount you pay in interest will decrease accordingly. The property tax and homeowners insurance will increase over time, but for the most part, payments on these types of loans vary little.
At the beginning of a a fixed-rate mortgage loan, the majority the payment is applied to interest. The amount paid toward principal increases up slowly each month.
You can choose a fixed-rate loan in order to lock in a low interest rate. People choose these types of loans because interest rates are low and they want to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at the best rate currently available. Call Bancmart Mortgage Network, Inc. at (773) 205-2323 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. A few of these are: the 6-month Certificate of Deposit (CD) rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most ARM programs feature a "cap" that protects borrowers from sudden monthly payment increases. There may be a cap on how much your interest rate can increase in one period. For example: no more than two percent a year, even if the underlying index goes up by more than two percent. Sometimes an ARM features a "payment cap" which guarantees that your payment will not increase beyond a fixed amount over the course of a given year. In addition, almost all ARM programs have a "lifetime cap" — your rate can't exceed the cap percentage.
ARMs most often feature the lowest, most attractive rates at the beginning of the loan. They provide that rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for a certain number of years (3 or 5), then they adjust after the initial period. These loans are usually best for borrowers who expect to move within three or five years. These types of ARMs are best for borrowers who plan to move before the loan adjusts.
You might choose an Adjustable Rate Mortgage to take advantage of a lower introductory interest rate and count on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up when they cannot sell or refinance at the lower property value.
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