Adjustable versus fixed loans
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A fixed-rate loan features a fixed payment amount for the entire duration of the loan. The property tax and homeowners insurance will increase over time, but in general, payments on fixed rate loans change little over the life of the loan.
During the early amortization period of a fixed-rate loan, a large percentage of your payment pays interest, and a significantly smaller percentage goes to principal. As you pay on the loan, more of your payment goes toward principal.
You can choose a fixed-rate loan in order to lock in a low rate. Borrowers choose fixed-rate loans when interest rates are low and they wish to lock in the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call The Mortgage Network at (303) 993-6358 for details.
There are many different 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. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which guarantees that your payment will not go above a certain amount over the course of a given year. In addition, the great majority of adjustable programs feature a "lifetime cap" — your rate will never go over the cap amount.
ARMs most often have the lowest rates toward the beginning of the loan. They provide that rate for an initial period that varies greatly. You've likely read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are often best for borrowers who anticipate moving 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.
You might choose an Adjustable Rate Mortgage to take advantage of a very low introductory rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. ARMs can be risky when property values go down and borrowers cannot sell or refinance.
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