Differences between adjustable and fixed rate loans
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A fixed-rate loan features the same payment amount for the entire duration of the loan. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. For the most part payment amounts on your fixed-rate loan will be very stable.
At the beginning of a a fixed-rate mortgage loan, the majority your payment is applied to interest. 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 interest rate. People choose these types of loans when interest rates are low and they wish to lock in this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at the best rate currently available. Call Crown Mortgage at (434) 975-5626 to learn more.
There are many types of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.
Most ARMs feature this cap, which means they won't increase above a certain amount in a given period. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than a couple percent a year, even if the index the rate is based on increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount that the monthly payment can increase in one period. The majority of ARMs also cap your rate over the life of the loan period.
ARMs most often have the lowest, most attractive rates toward the start of the loan. They usually guarantee the lower rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". In 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 adjust after the initial period. Loans like this are best for borrowers who anticipate moving in three or five years. These types of adjustable rate programs are best for borrowers who plan to sell their house or refinance before the loan adjusts.
Most borrowers who choose ARMs choose them when they want to get lower introductory rates and do not plan on staying in the home longer than the introductory low-rate period. ARMs can be risky when property values decrease and borrowers can't sell or refinance their loan.
Have questions about mortgage loans? Call us at (434) 975-5626. It's our job to answer these questions and many others, so we're happy to help!