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 mortgage. The amount of the payment allocated for principal (the actual loan amount) will go up, but the amount you pay in interest will go down in the same amount. The property taxes and homeowners insurance will increase over time, but for the most part, payments on fixed rate loans don't increase much.
At the beginning of a a fixed-rate mortgage loan, most of the payment goes toward interest. The amount applied to your principal amount goes up slowly every month.
Borrowers might choose a fixed-rate loan in order to lock in a low rate. People choose these types of 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 with a fixed-rate loan can offer greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at the best rate currently available. Call Axiom Lending Group at 800-681-1036 to discuss your situation with one of our professionals.
Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, interest for ARMs are determined by an outside index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most programs feature a cap that protects borrowers from sudden increases in monthly payments. Some ARMs can't increase more than two percent per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount that your monthly payment can go up in one period. In addition, almost all adjustable programs have a "lifetime cap" — your interest rate can't ever exceed the capped percentage.
ARMs most often have their lowest, most attractive rates at the beginning. They usually provide that rate from a month to ten years. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are usually best for people who expect to move within three or five years. These types of ARMs are best for people who plan to move before the loan adjusts.
Most people who choose ARMs do so because they want to take advantage of lower introductory rates and do not plan on staying in the house for any longer than the introductory low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates if they can't sell their home or refinance with a lower property value.
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