Differences between adjustable and fixed loans
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With a fixed-rate loan, your payment remains the same for the life of the mortgage. The portion of the payment allocated to your principal (the loan amount) will increase, but the amount you pay in interest will go down accordingly. The property tax and homeowners insurance will go up over time, but for the most part, payment amounts on fixed rate loans don't increase much.
During the early amortization period of a fixed-rate loan, a large percentage of your payment pays interest, and a much smaller part goes to principal. As you pay on the loan, more of your payment goes toward principal.
Borrowers can choose a fixed-rate loan to lock in a low rate. People select these types of loans because interest rates are low and they want to lock in the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide more 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 Mortgage Headquarters of Missouri, Inc at (573) 302-9990 to learn more.
Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, the interest rates for ARMs are determined by a federal index. A few of these are: the 6-month CD rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most ARM programs feature a "cap" that protects you from sudden increases in monthly payments. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than a couple percent a year, even if the underlying index goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount your payment can increase in one period. Most ARMs also cap your rate over the duration of the loan period.
ARMs most often have the lowest rates at the start of the loan. They provide that rate for an initial period that varies greatly. You've probably read about 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. It then adjusts every year. These 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 programs benefit borrowers who will move before the initial lock expires.
You might choose an Adjustable Rate Mortgage to get a lower initial interest rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs can be risky in a down market because homeowners could be stuck with increasing rates when they cannot sell their home or refinance with a lower property value.
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