Fixed-Rate Home Loans and Payments remain the same for the entire duration of your mortgage. And the longer you pay your loan, the more of your payment goes toward principal reduction. The most common Fixed rate mortgage terms are the 30 Year Fixed Rate & 15 Year Fixed Rate. Borrowers who choose a Fixed Rate Loan, do so to lock in a low interest rate for the entire mortgage term.
Adjustable Rate Mortgage Loans often called ARMs typically adjust annually, based on a predetermined Margin (often 2.25%) plus a predefined Index (usually the Wall Street Journal Treasury Bond Index).
Most ARM loans feature a Start Rate, an Annual Rate Cap, and a life of loan rate and payment Ceiling. ARM Rates usually start at a lower rate for 5 to 7 years, and then increase annually by adding the current Treasury Bond Index + a Predetermined Margin. For example, a typical 5/1 ARM is fixed for the first 5 years, and can adjust 2% per year thereafter, with a lifetime ceiling of 5%. The terms of this 5/1 ARM are stated as 5/2/5. If the loan is a 7/1 ARM, terms are typically stated as 7/2/5. Hybrid ARM rates and payments are Fixed for the first 5, 7 or 10 years, and then adjust annually thereafter. These adjustable rate mortgages are most beneficial for a borrower who plans to sell or refinance their home within the 5, 7 or 10 year fixed rate period. If not, the 5/1, 7/1 and 10/1 Hybrid ARM adjusts annually after the initial fixed rate period expires.
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