Differences between adjustable and fixed loans
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With a fixed-rate loan, your monthly payment doesn't change for the life of your mortgage. The longer you pay, the more of your payment goes toward principal. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally monthly payments for your fixed-rate mortgage will be very stable.
During the early amortization period of a fixed-rate loan, a large percentage of your payment pays interest, and a significantly smaller percentage toward principal. As you pay , more of your payment is applied to principal.
Borrowers can choose a fixed-rate loan to lock in a low interest rate. Borrowers select fixed-rate 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 offer more monthly payment stability. 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 PFS Funding at (925) 560-7644 for details.
There are many kinds of Adjustable Rate Mortgages. ARMs are generally adjusted every six months, based on various indexes.
Most programs feature a "cap" that protects you from sudden increases in monthly payments. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than a couple percent per year, even though the index the rate is based on goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount your monthly payment can increase in a given period. The majority of ARMs also cap your interest rate over the duration of the loan period.
ARMs usually start at a very low rate that may increase over time. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is fixed for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are best for borrowers who anticipate moving within three or five years. These types of adjustable rate loans are best for borrowers who plan to move before the loan adjusts.
Most borrowers who choose ARMs choose them when they want to get lower introductory rates and do not plan on remaining in the home for any longer than this initial low-rate period. ARMs are risky if property values go down and borrowers cannot sell their home or refinance their loan.
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