Differences between adjustable and fixed rate loans

A fixed-rate loan features the same payment over the life of the loan. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally payment amounts on your fixed-rate mortgage will be very stable.

Your first few years of payments on a fixed-rate loan go mostly toward interest. The amount paid toward your principal amount goes up gradually each month.

Borrowers can choose a fixed-rate loan to lock in a low rate. People choose fixed-rate loans when interest rates are low and they wish to lock in at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at a good rate. Call Homewithloan.com at 9727982110 to learn more.

Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. Generally, interest on ARMs are based on a federal index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most programs have a "cap" that protects borrowers from sudden monthly payment increases. Some ARMs can't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that ensures that your payment won't increase beyond a fixed amount in a given year. In addition, almost all ARM programs feature a "lifetime cap" — the rate can't ever go over the capped amount.

ARMs most often feature the lowest rates at the beginning of the loan. They usually provide the lower rate from a month to ten years. You've likely read about 5/1 or 3/1 ARMs. For these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then adjust. These loans are usually best for borrowers who anticipate moving within three or five years. These types of ARMs benefit people who plan to move before the loan adjusts.

You might choose an Adjustable Rate Mortgage to take advantage of a lower introductory rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs can be risky in a down market because homeowners can get stuck with increasing rates if they can't sell their home or refinance at the lower property value.

Have questions about mortgage loans? Call us at 9727982110. We answer questions about different types of loans every day.

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