You pay every two weeks, a total of 26
payments a year -- which adds up to an "extra" monthly payment
every year.
During the early amortization period of a fixed-rate
loan, a large percentage of your monthly payment goes toward
interest, and a much smaller part toward principal. That
gradually reverses itself as the loan ages.
You might choose a fixed-rate loan if you want to lock
in a low rate. If you have an Adjustable Rate Mortgage (ARM)
now, refinancing with a fixed-rate loan can give you more
monthly payment stability.
Adjustable Rate Mortgages -- ARMs, as we called
them above -- come in even more varieties. Generally, ARMs
determine what you must pay based on an outside index, perhaps
the 6-month Certificate of Deposit (CD) rate, the one-year
Treasury Security rate, the Federal Home Loan Bank's 11th
District Cost of Funds Index (COFI), or others. They may adjust
every six months or once a year.
Most programs have a "cap" that protects you from your
monthly payment going up too much at once. There may be a cap on
how much your interest rate can go up in one period -- say, no
more than two percent per year, even if the underlying index
goes up by more than two percent. You may have a "payment cap,"
that instead of capping the interest rate directly caps the
amount your monthly payment can go up in one period. In
addition, almost all ARM programs have a "lifetime cap" -- your
interest rate can never exceed that cap amount, no matter what.
ARMs often have their lowest, most attractive rates at
the beginning of the loan, and can guarantee that rate for
anywhere from a month to ten years. You may hear people talking
about or read about what are called "3/1 ARMs" or "5/1 ARMs" or
the like. That means that the introductory rate is set for three
or five years, and then adjusts according to an index every year
thereafter for the life of the loan. Loans like this are often
best for people who anticipate moving -- and therefore selling
the house to be mortgaged -- within three or five years,
depending on how long the lower rate will be in effect.
You might choose an ARM to take advantage of a lower
introductory rate and count on either moving, refinancing again
or simply absorbing the higher rate after the introductory rate
goes up. With ARMs, you do risk your rate going up, but you also
take advantage when rates go down by pocketing more money each
month that would otherwise have gone toward your mortgage
payment.
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