Differences between fixed and adjustable rate loans

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With a fixed-rate loan, your monthly payment stays the same for the entire duration of the mortgage. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but for the most part, payments on fixed rate loans change little over the life of the loan.

Early in a fixed-rate loan, a large percentage of your payment pays interest, and a much smaller part goes to principal. This proportion gradually reverses itself as the loan ages.

You might choose a fixed-rate loan to lock in a low interest rate. People choose these types of loans when interest rates are low and they wish to lock in at the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at the best rate currently available. Call G & M Wolkenberg Inc. at 516 536-2525 for details.

There are many different types of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.

Most ARM programs have a "cap" that protects you from sudden increases in monthly payments. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that the payment can increase in a given period. The majority of ARMs also cap your rate over the life of the loan.

ARMs most often have the lowest, most attractive rates at the start. They provide that interest rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set for three or five years. It then adjusts every year. These kinds of loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are often best for people who anticipate moving within three or five years. These types of ARMs benefit people who will move before the loan adjusts.

You might choose an Adjustable Rate Mortgage to take advantage of a very low introductory interest rate and plan on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs can be risky if property values decrease and borrowers are unable to sell their home or refinance their loan.

Have questions about mortgage loans? Call us at 516 536-2525. It's our job to answer these questions and many others, so we're happy to help!

 

Licensed Mortgage Banker - NYS Department of Financial Services

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