Fixed versus adjustable loans
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With a fixed-rate loan, your monthly payment remains the same for the entire duration of the loan. The amount allocated for principal (the loan amount) will increase, but your interest payment will go down in the same amount. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally monthly payments for your fixed-rate mortgage will increase very little.
Your first few years of payments on a fixed-rate loan are applied mostly to pay interest. As you pay , more of your payment goes toward principal.
You might choose a fixed-rate loan in order to lock in a low rate. Borrowers select these types of loans when interest rates are low and they want to lock in this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide 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 Bonnie Andrews at 901-674-8593 to discuss how we can help.
There are many types of Adjustable Rate Mortgages. ARMs are generally adjusted every six months, based on various indexes.
Most Adjustable Rate Mortgages feature this cap, so they can't increase above a specific amount in a given period. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which guarantees that your payment won't go above a certain amount in a given year. Almost all ARMs also cap your interest rate over the life of the loan.
ARMs most often have their lowest, most attractive rates at the start. They guarantee the lower rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set for three or five years. It then adjusts every year. These types of loans are fixed for 3 or 5 years, then they adjust. Loans like this are best for borrowers who expect to move in three or five years. These types of adjustable rate loans are best for borrowers who plan to move before the initial lock expires.
Most borrowers who choose ARMs do so because they want to get lower introductory rates and do not plan to remain in the house for any longer than the initial low-rate period. ARMs are risky if property values go down and borrowers are unable to sell or refinance their loan.
Have questions about mortgage loans? Call us at 901-674-8593. We answer questions about different types of loans every day.