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Fixed Rate Mortgages
Adjustable Rate Mortgages (ARMs)
Standard ARMS and the Differences

Fixed Rate Mortgages

This is the most common type of mortgage program. Your monthly payments for interest and principal never change. Property taxes and homeowners insurance may increase, but your basic monthly payments will be stable.

Fixed rate mortgages are available for 30 years, 20 years, 15 years and even 10 years.

Fixed rate fully amortizing loans have two distinct features. First, the interest rate remains fixed for the life of the loan. Secondly, the payments remain level for the life of the loan and are structured to repay the loan at the end of the loan term. The most common fixed rate loans are 15 year and 30-year mortgages.

During the early amortization period, a large percentage of the monthly payment is used for paying the interest. As the loan is paid down, more of the monthly payment is applied to principal.

Adjustable Rate Mortgages (ARMs)

ARMs allow you to borrow more, and may be right for you.

These loans usually begin with an interest rate that is 2-3 percent below a comparable fixed rate mortgage, and could allow you to buy a more expensive home.

However, the interest rate changes at specified intervals (for example, every year) depending on changing market conditions. If interest rates go up, your monthly mortgage payment will go up, too. However, if rates go down, your mortgage payment will drop also.

There are also mortgages that combine aspects of fixed and adjustable rate mortgages - starting at a low fixed rate for seven to ten years, for example, and then adjusting to market conditions. Ask your mortgage professional about these and other special kinds of mortgages that fit your specific financial situation.

Standard ARMS and the Differences

A few options are available to fit your individual needs and your risk tolerance with the various market instruments.

ARMs with different indexes are available for both purchases and refinances. Choosing an ARM with an index that reacts quickly lets you take full advantage of falling interest rates. An index that lags behind the market lets you take advantage of lower rates after market rates have started to adjust upward.

The interest rate and monthly payment can change based on adjustments to the index rate.

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