Differences between fixed and adjustable loans
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With a fixed-rate loan, your payment remains the same for the entire duration of the loan. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but generally, payments on these types of loans vary little.
Early in a fixed-rate loan, most of your payment pays interest, and a much smaller part toward principal. As you pay , more of your payment goes toward principal.
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 wish to lock in the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call Citywide Home Loans at 4808226290 for details.
Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. Generally, the interest on ARMs are determined by a federal index. Some examples of outside indexes are: the 6-month CD rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most ARM programs have 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 if the index the rate is based on goes up by more than two percent. Sometimes an ARM features a "payment cap" which ensures your payment can't increase beyond a fixed amount over the course of a given year. Plus, the great majority of ARMs have a "lifetime cap" — the rate can't exceed the cap amount.
ARMs usually start out at a very low rate that may increase over time. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the introductory 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 will move before the initial lock expires.
Most people who choose ARMs do so when they want to get lower introductory rates and do not plan to stay in the house for any longer than the initial low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up if they can't sell or refinance with a lower property value.
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