Differences between adjustable and fixed loans

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A fixed-rate loan features a fixed payment amount for the entire duration of the mortgage. 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 for a fixed-rate loan will be very stable.

Your first few years of payments on a fixed-rate loan go primarily toward interest. The amount paid toward principal increases up slowly each month.

Borrowers can choose a fixed-rate loan in order to lock in a low rate. Borrowers select fixed-rate loans when interest rates are low and they want to lock in at this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at the best rate currently available. Call Willow Bend Mortgage at (256) 734-6012 to learn more.

There are many different kinds of Adjustable Rate Mortgages. ARMs are normally adjusted every six months, based on various indexes.

The majority of ARMs feature this cap, so they won't go up over a specific amount in a given period of time. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than a couple percent a year, even if the index the rate is based on goes up by more than two percent. Sometimes an ARM features a "payment cap" that guarantees your payment can't increase beyond a certain amount in a given year. In addition, the great majority of adjustable programs feature a "lifetime cap" — this cap means that your rate will never go over the capped amount.

ARMs usually start out at a very low rate that usually increases over time. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are usually best for people who expect to move within three or five years. These types of ARMs are best for people who will move before the loan adjusts.

Most people who choose ARMs do so when they want to get lower introductory rates and do not plan on remaining in the house for any longer than this initial low-rate period. ARMs are risky if property values go down and borrowers cannot sell or refinance their loan.

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