Fixed versus adjustable loans
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With a fixed-rate loan, your payment doesn't change for the life of the mortgage. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but for the most part, payment amounts on fixed rate loans vary little.
Early in a fixed-rate loan, most of your payment goes toward interest, and a much smaller part goes to principal. That reverses itself as the loan ages.
You can choose a fixed-rate loan to lock in a low rate. People select fixed-rate loans because interest rates are low and they wish to lock in at this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at the best rate currently available. Call Cameron Financial Services, Inc at 303-997-7117 to discuss how we can help.
There are many different kinds of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.
The majority of Adjustable Rate Mortgages are capped, so they can't go up above a specified amount in a given period. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that your payment can increase in one period. Most ARMs also cap your rate over the life of the loan period.
ARMs most often have the lowest, most attractive rates toward the beginning. They usually guarantee that interest 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 a number of years (3 or 5), then adjust after the initial period. These loans are often best for people who expect to move in three or five years. These types of adjustable rate programs benefit people who plan to sell their house or refinance before the initial lock expires.
Most people who choose ARMs do so when they want to get lower introductory rates and don't plan to stay in the house for any longer than this introductory low-rate period. ARMs can be risky when property values decrease and borrowers cannot sell their home or refinance their loan.