Adjustable versus fixed loans

With a fixed-rate loan, your payment never changes for the entire duration of the loan. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally payments on your fixed-rate loan will be very stable.

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

You might choose a fixed-rate loan in order to lock in a low rate. Borrowers choose these types of loans when interest rates are low and they wish to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at the best rate currently available. Call Tenby J. Dahman at 3038627760 for details.

Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, the interest rates for ARMs are determined by a federal index. A few of these are: the 6-month CD rate, the 1 year rate on Treasure Securities, 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 two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that ensures that your payment won't go above a certain amount in a given year. Most ARMs also cap your interest rate over the duration of the loan.

ARMs most often have the lowest, most attractive rates at the start of the loan. They usually provide that interest rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are best for borrowers who expect to move within three or five years. These types of adjustable rate loans benefit people who plan to move before the initial lock expires.

You might choose an Adjustable Rate Mortgage to take advantage of a lower initial interest rate and count on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs can be risky when property values decrease and borrowers cannot sell their home or refinance their loan.

Have questions about mortgage loans? Call us at 3038627760. We answer questions about different types of loans every day.