Adjustable versus fixed loans
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A fixed-rate loan features a fixed payment for the entire duration of your loan. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part monthly payments for a fixed-rate mortgage will be very stable.
Early in a fixed-rate loan, most of your monthly payment goes toward interest, and a significantly smaller percentage goes to principal. As you pay on the loan, more of your payment is applied to principal.
Borrowers can choose a fixed-rate loan to lock in a low interest rate. People 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 into a fixed-rate loan can provide more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at a good rate. Call Glendale Mortgage at 610-853-6500 to discuss how we can help.
There are many different types of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.
Most Adjustable Rate Mortgages feature this cap, which means they can't go up over a specified amount in a given period of time. There may be 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. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that the payment can increase in one period. Additionally, the great majority of ARMs have a "lifetime cap" — this cap means that the interest rate will never go over the capped percentage.
ARMs usually start out at a very low rate that may increase over time. You may have heard about "3/1 ARMs" or "5/1 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 they adjust. Loans like this are often best for people who expect to move within three or five years. These types of adjustable rate loans benefit borrowers who plan to move before the initial lock expires.
You might choose an ARM to get a very low initial rate and plan on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs can be risky in a down market because homeowners can get stuck with increasing rates when they can't sell or refinance at the lower property value.
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