Differences between fixed and adjustable rate loans
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A fixed-rate loan features the same payment for the entire duration of your loan. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally payment amounts for a fixed-rate mortgage will increase very little.
When you first take out a fixed-rate loan, the majority your payment is applied to interest. As you pay , more of your payment goes toward principal.
Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select fixed-rate loans when interest rates are low and they wish to lock in this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide 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 Cypress Mortgage at 312-829-1010 to discuss how we can help.
Adjustable Rate Mortgages — ARMs, come in even more varieties. Generally, interest rates for ARMs are determined by an outside index. Some examples of outside indexes are: the 6-month CD rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most Adjustable Rate Mortgages are capped, so they can't go up over a certain amount in a given period of time. 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 goes up by more than two percent. Sometimes an ARM features a "payment cap" that ensures your payment won't go above a fixed amount in a given year. Most ARMs also cap your rate over the duration of the loan period.
ARMs most often have their lowest, most attractive rates at the beginning of the loan. They usually provide that interest rate for an initial period that varies greatly. You've probably read about 5/1 or 3/1 ARMs. In these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are best for people who expect to move within three or five years. These types of ARMs benefit borrowers who will move before the initial lock expires.
You might choose an Adjustable Rate Mortgage to take advantage of a very low introductory interest rate and count on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs are risky when property values go down and borrowers cannot sell or refinance.