Fixed versus adjustable rate loans

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A fixed-rate loan features the same payment over the life of the loan. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but in general, payments on these types of loans don't increase much.

Your first few years of payments on a fixed-rate loan go primarily toward interest. This proportion reverses as the loan ages.

Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. People choose fixed-rate loans because interest rates are low and they want to lock in this lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at a good rate. Call SquareLend at 5627733870 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 ARM programs have a "cap" that protects you from sudden monthly payment increases. There may be a cap on how much your interest rate can go up in one period. For example: no more than two percent per year, even if the underlying index increases by more than two percent. Sometimes an ARM has a "payment cap" which ensures your payment will not go above a fixed amount over the course of a given year. Additionally, the great majority of adjustable programs have a "lifetime cap" — this means that the interest rate can't go over the capped amount.

ARMs most often feature the lowest rates at the beginning. They usually provide the lower interest rate from a month to ten years. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial 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 adjust after the initial period. Loans like this are often best for people who anticipate moving in three or five years. These types of adjustable rate programs are best for borrowers who will sell their house or refinance before the loan adjusts.

Most people who choose ARMs do so because they want to get lower introductory rates and don't plan to remain in the home longer than the introductory low-rate period. ARMs can be risky in a down market because homeowners could be stuck with rates that go up when they can't sell or refinance with a lower property value.

Have questions about mortgage loans? Call us at 5627733870. It's our job to answer these questions and many others, so we're happy to help!

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