Fixed versus adjustable rate loans
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A fixed-rate loan features a fixed payment for the entire duration of your loan. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part, payment amounts on your fixed-rate mortgage will be very stable.
During the early amortization period of a fixed-rate loan, most of your monthly payment pays interest, and a much smaller percentage toward principal. The amount applied to your principal amount increases gradually each month.
You can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select fixed-rate loans because interest rates are low and they want to lock in at this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at a favorable rate. Call MainStreet Mortgage at (818) 874-9900 to discuss how we can help.
Adjustable Rate Mortgages — ARMs come in even more varieties. ARMs usually adjust every six months, based on various indexes.
Most ARM programs have a "cap" that protects borrowers from sudden monthly payment increases. Some ARMs can't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which ensures your payment won't increase beyond a fixed amount in a given year. Plus, the great majority of ARM programs have a "lifetime cap" — your rate can't go over the cap amount.
ARMs usually start out at a very low rate that usually increases as the loan ages. You've likely read about 5/1 or 3/1 ARMs. For these loans, the initial rate is set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjusted. These loans are often best for borrowers who expect to move within three or five years. These types of adjustable rate loans most benefit borrowers who will move before the initial lock expires.
You might choose an ARM to get a lower introductory rate and count on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs are risky if property values go down and borrowers are unable to sell or refinance their loan.
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