Adjustable versus fixed rate loans
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With a fixed-rate loan, your monthly payment never changes for the life of your mortgage. The amount that goes to your principal (the actual loan amount) will increase, but the amount you pay in interest will decrease accordingly. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but for the most part, payment amounts on these types of loans don't increase much.
Early in a fixed-rate loan, a large percentage of your monthly payment goes toward interest, and a much smaller part toward principal. As you pay , more of your payment goes toward principal.
Borrowers can choose a fixed-rate loan in order to lock in a low rate. People select fixed-rate loans because interest rates are low and they wish to lock in at this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at the best rate currently available. Call Pacificwide Lending at 925-461-0500 for details.
There are many types of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.
The majority of ARMs feature this cap, which means they won't go up above a specified amount in a given period. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that ensures that your payment will not go above a fixed amount in a given year. The majority of ARMs also cap your interest rate over the life of the loan period.
ARMs most often feature the lowest rates toward the beginning. They guarantee that rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are best for people who expect to move within three or five years. These types of ARMs benefit borrowers who plan to sell their house or refinance before the initial lock expires.
Most borrowers who choose ARMs do so when they want to take advantage of lower introductory rates and do not plan on remaining in the house for any longer than the initial low-rate period. ARMs can be risky when property values go down and borrowers can't sell their home or refinance.
Have questions about mortgage loans? Call us at 925-461-0500. It's our job to answer these questions and many others, so we're happy to help!