Differences between fixed and adjustable loans
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With a fixed-rate loan, your payment never changes for the life of the loan. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally payments on your fixed-rate loan will be very stable.
Your first few years of payments on a fixed-rate loan go primarily toward interest. As you pay , more of your payment is applied to principal.
You might choose a fixed-rate loan in order to lock in a low rate. People choose these types of loans when interest rates are low and they wish to lock in the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at a favorable rate. Call Dalton Mortgage Group at 405.823.5961 to discuss how we can help.
There are many types of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.
Most programs feature a cap that protects borrowers from sudden increases in monthly payments. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that ensures your payment can't go above a certain amount in a given year. The majority of ARMs also cap your rate over the life of the loan.
ARMs most often have their lowest, most attractive rates toward the beginning of the loan. 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 fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for a certain number of years (3 or 5), then they adjust. Loans like this are usually best for borrowers who expect to move within three or five years. These types of ARMs are best for people who will sell their house or refinance before the loan adjusts.
Most borrowers who choose ARMs choose them when they want to get lower introductory rates and don't plan on remaining in the house for any longer than this initial low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up when they can't sell their home or refinance at the lower property value.
Have questions about mortgage loans? Call us at 405.823.5961. It's our job to answer these questions and many others, so we're happy to help!