Fixed Versus Adjustable Loans
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A fixed-rate loan features a fixed payment for the entire duration of your mortgage. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but in general, payments on fixed rate loans vary little.
Early in a fixed-rate loan, a large percentage of your payment goes toward interest, and a significantly smaller percentage toward principal. That gradually reverses itself as the loan ages.
Borrowers can choose a fixed-rate loan to lock in a low interest rate. People choose these types of loans because interest rates are low and they wish to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call MinnTrust Mortgage at 612-327-4544 to learn more.
Adjustable Rate Mortgages — ARMs, come in many varieties. ARMs are generally adjusted every six months, based on various indexes.
Most ARMs feature this cap, so they can't increase over a certain amount in a given period of time. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than a couple percent per 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 that the monthly payment can go up in one period. The majority of ARMs also cap your rate over the life of the loan period.
ARMs most often have the lowest, most attractive rates toward the start. They provide that rate from a month to ten years. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust. These loans are usually best for borrowers who expect to move within three or five years. These types of adjustable rate loans benefit borrowers who plan to move before the initial lock expires.
You might choose an ARM to take advantage of a lower introductory rate and plan on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates if they cannot sell or refinance at the lower property value.
Have questions about mortgage loans? Call Joe Wagner at 612-327-4544. It's his job to answer these questions and many others, so he's happy to help!