Differences between fixed and adjustable rate loans
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A fixed-rate loan features a fixed payment over the life of the loan. The property taxes and homeowners insurance will go up over time, but for the most part, payments on fixed rate loans vary little.
During the early amortization period of a fixed-rate loan, most of your monthly payment pays interest, and a significantly smaller percentage goes to principal. As you pay , more of your payment is applied to principal.
Borrowers might choose a fixed-rate loan to lock in a low interest rate. People select fixed-rate loans when interest rates are low and they want to lock in this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide 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 the best rate currently available. Call American Mortgage Alliance at 303-840-7424 for details.
There are many different types of Adjustable Rate Mortgages. Generally, the interest rates on ARMs are based on an outside index. A few of these are: the 6-month 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. Your ARM may feature a cap on interest rate increases 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 increases by more than two percent. Sometimes an ARM features a "payment cap" which ensures your payment will not increase beyond a fixed amount in a given year. The majority of ARMs also cap your interest rate over the duration of the loan.
ARMs usually start out at a very low rate that may increase as the loan ages. You've probably read about 5/1 or 3/1 ARMs. For these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These loans are fixed for a certain number of years (3 or 5), then they adjust. These loans are best for borrowers who expect to move within three or five years. These types of adjustable rate programs benefit borrowers who will move before the initial lock expires.
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 the initial low-rate period. ARMs can be risky if property values decrease and borrowers can't sell or refinance their loan.