Adjustable versus fixed rate loans

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

Your first few years of payments on a fixed-rate loan are applied primarily to pay interest. As you pay on the loan, more of your payment goes toward principal.

You might choose a fixed-rate loan in order to lock in a low rate. Borrowers choose fixed-rate loans when interest rates are low and they want to lock in this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more stability 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 good rate. Call Custom Lending Group at 7072522700 to discuss your situation with one of our professionals.

There are many types of Adjustable Rate Mortgages. Generally, interest for ARMs are based on a federal index. A few of these are: the 6-month CD rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most Adjustable Rate Mortgages are capped, which means they can't go up over a specified amount in a given period of time. Some ARMs can't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that guarantees your payment won't go above a certain amount in a given year. Most ARMs also cap your rate over the life of the loan period.

ARMs most often feature the lowest rates at the start. They provide that rate for an initial period that varies greatly. You've probably 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 kinds of loans are fixed for a number of years (3 or 5), then adjust. These loans are best for people who expect to move in three or five years. These types of adjustable rate programs most benefit borrowers who plan to move before the loan adjusts.

Most borrowers who choose ARMs do so when they want to get lower introductory rates and don't plan on staying in the home for any longer than this introductory low-rate period. ARMs can be risky in a down market because homeowners could be stuck with increasing rates if they cannot sell their home or refinance with a lower property value.

Have questions about mortgage loans? Call us at 7072522700. It's our job to answer these questions and many others, so we're happy to help!

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