Fixed versus adjustable rate loans

A fixed-rate loan features the same payment over the life of the loan. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but generally, payments on fixed rate loans don't increase much.

At the beginning of a a fixed-rate loan, most of the payment goes toward interest. That reverses as the loan ages.

Borrowers can choose a fixed-rate loan in order to lock in a low rate. People choose these types of loans because interest rates are low and they want to lock in at this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at a favorable rate. Call Pacific Loan Brokers at 877-310-6200 to learn more.

Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. ARMs are normally adjusted every six months, based on various indexes.

Most ARM programs have a "cap" that protects you from sudden increases in monthly payments. Some ARMs won't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that ensures your payment can't increase beyond a certain amount over the course of a given year. Additionally, almost all adjustable programs feature a "lifetime cap" — the interest rate can't exceed the capped amount.

ARMs most often have the lowest rates at the start. They usually guarantee the lower rate for an initial period that varies greatly. You've probably read about 5/1 or 3/1 ARMs. For these loans, the introductory rate is set for three or five years. It then adjusts every year. These kinds of loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are best for people who anticipate moving in three or five years. These types of ARMs are best for people who plan to move before the initial lock expires.

You might choose an Adjustable Rate Mortgage to get a lower initial interest rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs can be risky when property values decrease and borrowers are unable to sell their home or refinance their loan.

Have questions about mortgage loans? Call us at 877-310-6200. We answer questions about different types of loans every day.

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