Fixed versus adjustable loans

A fixed-rate loan features the same payment for the entire duration of your loan. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part payment amounts for a fixed-rate mortgage will be very stable.

At the beginning of a a fixed-rate loan, the majority your payment goes toward interest. As you pay on the loan, more of your payment goes toward principal.

You might choose a fixed-rate loan to lock in a low interest rate. Borrowers choose fixed-rate loans because interest rates are low and they want to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at a favorable rate. Call Pacific Loan Brokers at 877-310-6200 to discuss how we can help.

There are many kinds of Adjustable Rate Mortgages. ARMs are normally adjusted every six months, based on various indexes.

Most Adjustable Rate Mortgages are capped, so they can't increase above a specific amount in a given period of time. There may be a cap on interest rate variances over the course of a year. For example: no more than two percent a year, even if the index the rate is based on increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount the monthly payment can increase in a given period. Most ARMs also cap your rate over the duration of the loan period.

ARMs most often have their lowest, most attractive rates at the beginning of the loan. They provide that interest rate for an initial period that varies greatly. You've likely read about 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are often best for borrowers who expect to move within three or five years. These types of ARMs are best for borrowers who plan to move before the loan adjusts.

You might choose an ARM to get a very low introductory interest rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky if property values go down and borrowers can't sell or refinance.

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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