Differences between adjustable and fixed rate loans
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With a fixed-rate loan, your monthly payment never changes for the life of your loan. The amount of the payment that goes for your principal (the actual loan amount) goes up, however, the amount you pay in interest will go down accordingly. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part monthly payments on your fixed-rate mortgage will be very stable.
At the beginning of a a fixed-rate loan, most of the payment goes toward interest. As you pay on the loan, more of your payment is applied to principal.
You might choose a fixed-rate loan in order to lock in a low interest rate. People select fixed-rate loans when interest rates are low and they want to lock in this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at a good rate. Call Mann Mortgage at (808) 264-3715 for details.
There are many types of Adjustable Rate Mortgages. ARMs are generally adjusted twice a year, based on various indexes.
The majority of ARMs feature this cap, so they won't increase over a specified amount in a given period. There may be a cap on interest rate increases over the course of a year. For example: no more than two percent a year, even if the underlying index increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount the payment can go up in one period. Almost all ARMs also cap your rate over the duration of the loan period.
ARMs most often have their lowest, most attractive rates toward the start of the loan. They provide that rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is set for three or five years. It then adjusts every year. These types of loans are fixed for 3 or 5 years, then adjust. These loans are usually best for borrowers who anticipate moving within three or five years. These types of adjustable rate programs most benefit people who plan to move before the initial lock expires.
Most people who choose ARMs choose them when they want to get lower introductory rates and don't plan on remaining in the home 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 cannot sell their home or refinance at the lower property value.
Have questions about mortgage loans? Call us at (808) 264-3715. It's our job to answer these questions and many others, so we're happy to help!