Adjustable versus fixed loans
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A fixed-rate loan features a fixed payment amount over the life of your loan. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part payment amounts on a fixed-rate mortgage will be very stable.
Your first few years of payments on a fixed-rate loan are applied primarily toward interest. That reverses itself as the loan ages.
You might choose a fixed-rate loan to lock in a low rate. People choose fixed-rate loans because interest rates are low and they wish to lock in at this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at the best rate currently available. Call Guaranty Federal Mortgage at 972-334-0566 to discuss your situation with one of our professionals.
There are many different types of Adjustable Rate Mortgages. Generally, interest for ARMs are based on a federal index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the one-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 borrowers from sudden increases in monthly payments. Some ARMs won't increase more than two percent per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that your monthly payment can increase in a given period. The majority of ARMs also cap your rate over the duration of the loan period.
ARMs usually start out at a very low rate that may increase as the loan ages. You've likely read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These types of loans are fixed for a number of years (3 or 5), then they adjust. These loans are often best for people who anticipate moving within three or five years. These types of adjustable rate programs benefit borrowers who will sell their house or refinance before the loan adjusts.
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 home for any longer than the introductory low-rate period. ARMs can be risky when property values go down and borrowers can't sell their home or refinance their loan.
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