Differences between adjustable and fixed rate loans

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With a fixed-rate loan, your payment never changes for the entire duration of the mortgage. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance will go up over time, but for the most part, payments on fixed rate loans vary little.

During the early amortization period of a fixed-rate loan, most of your payment goes toward interest, and a much smaller percentage toward principal. The amount applied to your principal amount increases up gradually each month.

You can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose these types of 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 offer greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at the best rate currently available. Call Elite Financing Group at to learn more.

Adjustable Rate Mortgages — ARMs, come in a great number of varieties. ARMs are normally adjusted twice a year, based on various indexes.

Most ARMs feature this cap, which means they can't increase over a specific amount in a given period of time. There may be a cap on interest rate variances over the course of a year. For example: no more than two percent per year, even if the index the rate is based on increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount the payment can increase in one period. Most ARMs also cap your interest rate over the duration of the loan period.

ARMs usually start at a very low rate that usually increases as the loan ages. You've probably heard of 5/1 or 3/1 ARMs. For these loans, the initial rate is set for three or five years. It then adjusts every year. These kinds of loans are fixed for a certain number of years (3 or 5), then they adjust. Loans like this are usually best for people who anticipate moving within three or five years. These types of adjustable rate loans are best for people who plan to move before the loan adjusts.

Most borrowers who choose ARMs do so because they want to take advantage of lower introductory rates and do not plan on staying in the home longer than this introductory low-rate period. ARMs can be risky in a down market because homeowners could be stuck with rates that go up if they cannot sell or refinance with a lower property value.

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