Fixed versus adjustable loans
A fixed-rate loan features the same payment over the life of your loan. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. For the most part monthly payments on your fixed-rate mortgage will increase very little.
During the early amortization period of a fixed-rate loan, a large percentage of your payment pays interest, and a significantly smaller part toward principal. The amount applied to principal increases up gradually every month.
Borrowers might choose a fixed-rate loan to lock in a low rate. People choose these types of loans when 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 provide greater monthly payment stability. 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 Financial Edge Mortgage Corp. at 425-508-9988 to discuss your situation with one of our professionals.
There are many different kinds of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.
Most programs have a "cap" that protects you from sudden increases in monthly payments. There may be a cap on how much your interest rate can go up in one period. For example: no more than a couple percent a year, even though the index the rate is based on goes up by more than two percent. Sometimes an ARM features a "payment cap" which guarantees that your payment will not go above a fixed amount in a given year. The majority of ARMs also cap your rate over the duration of the loan period.
ARMs most often have their lowest rates toward the start. They usually provide the lower rate from a month to ten years. You've probably heard of 5/1 or 3/1 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 a number of years (3 or 5), then adjust after the initial period. These loans are best for borrowers who anticipate moving within three or five years. These types of ARMs most benefit borrowers who plan to move before the initial lock expires.
Most borrowers who choose ARMs do so when they want to take advantage of lower introductory rates and don't plan to remain in the house for any longer than the introductory low-rate period. ARMs can be risky when property values decrease and borrowers are unable to sell or refinance.
Have questions about mortgage loans? Call us at 425-508-9988. It's our job to answer these questions and many others, so we're happy to help!
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