Differences between adjustable and fixed rate loans

A fixed-rate loan features a fixed payment for the entire duration of the mortgage. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but in general, payments on these types of loans change little over the life of the loan.

Your first few years of payments on a fixed-rate loan go mostly to pay interest. The amount applied to your principal amount increases up gradually each month.

You can choose a fixed-rate loan to lock in a low rate. Borrowers choose fixed-rate loans because interest rates are low and they wish to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at a good rate. Call Mario Vega at 877-310-6200 for details.

Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. Generally, the interest for ARMs are determined by an outside index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

The majority of Adjustable Rate Mortgages are capped, which means they won't increase above a specified amount in a given period of time. Some ARMs won't increase more than two percent per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that your monthly payment can increase in one period. Almost all ARMs also cap your rate over the duration of the loan.

ARMs usually start out at a very low rate that may increase over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial 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 after the initial period. Loans like this are best for people who expect to move in three or five years. These types of adjustable rate programs are best for people who will move before the initial lock expires.

Most borrowers who choose ARMs do so when they want to get lower introductory rates and don't plan to stay in the home for any longer than the introductory low-rate period. ARMs can be risky when property values decrease and borrowers are unable to 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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