Adjustable versus fixed 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 for a fixed-rate loan will be very stable.

When you first take out a fixed-rate mortgage loan, most of your payment goes toward interest. The amount paid toward principal increases up gradually each month.

Borrowers might choose a fixed-rate loan to lock in a low rate. Borrowers select these types of loans because interest rates are low and they want to lock in this low 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 help you lock in a fixed-rate at a good rate. Call Tenby J. Dahman at 3038627760 to learn more.

There are many types of Adjustable Rate Mortgages. Generally, the interest rates on ARMs are based on a federal index. Some examples of outside indexes are: the 6-month CD rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARM programs feature a cap that protects borrowers from sudden increases in monthly payments. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount the monthly payment can go up in a given period. Plus, almost all ARMs feature a "lifetime cap" — this means that your interest rate can never exceed the cap amount.

ARMs usually start at a very low rate that may increase as the loan ages. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for a certain number of years (3 or 5), then adjust. These loans are best for borrowers who expect to move within three or five years. These types of adjustable rate loans most benefit borrowers who will sell their house or refinance before the loan adjusts.

You might choose an ARM to take advantage of a lower introductory interest rate and count on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs are risky when property values decrease and borrowers cannot sell their home or refinance their loan.

Have questions about mortgage loans? Call us at 3038627760. It's our job to answer these questions and many others, so we're happy to help!