Differences between adjustable and fixed rate loans

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A fixed-rate loan features a fixed payment over the life of the mortgage. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part payments on your fixed-rate loan will increase very little.

During the early amortization period of a fixed-rate loan, a large percentage of your payment pays interest, and a significantly smaller part toward principal. The amount applied to your principal amount goes up gradually every month.

Borrowers might choose a fixed-rate loan in order to lock in a low rate. People select fixed-rate loans when interest rates are low and they wish to lock in at the lower 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 can assist you in locking a fixed-rate at the best rate currently available. Call Blue Door Mortgage at (617) 527-BLUE(2583) for details.

There are many types of Adjustable Rate Mortgages. ARMs are generally adjusted every six months, based on various indexes.

The majority of Adjustable Rate Mortgages are capped, so they won't increase above a certain 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 per year, even though the index the rate is based on increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount your monthly payment can increase in a given period. In addition, the great majority of ARMs have a "lifetime cap" — this cap means that the interest rate won't exceed the capped amount.

ARMs most often feature the lowest rates at the beginning. They usually provide that rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is set for three or five years. After this period it adjusts every year. These kinds of loans are fixed for a number of years (3 or 5), then they adjust after the initial period. These loans are usually best for borrowers who anticipate moving in three or five years. These types of adjustable rate loans benefit borrowers who will move before the loan adjusts.

Most people who choose ARMs choose them when they want to take advantage of lower introductory rates and don't plan to stay in the home longer than this introductory low-rate period. ARMs are risky if property values decrease and borrowers can't sell their home or refinance.

Have questions about mortgage loans? Call us at (617) 527-BLUE(2583). We answer questions about different types of loans every day.

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