Adjustable versus fixed rate loans

A fixed-rate loan features the same payment amount over the life of the mortgage. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but in general, payment amounts on these types of loans vary little.

During the early amortization period of a fixed-rate loan, a large percentage of your payment goes toward interest, and a significantly smaller part toward principal. That reverses itself as the loan ages.

You might choose a fixed-rate loan to lock in a low rate. People select fixed-rate loans because interest rates are low and they want to lock in at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide more stability 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 Home Mortgage Lenders, Inc. at 8139881776 for details.

Adjustable Rate Mortgages — ARMs, come in even more varieties. Generally, the interest rates on ARMs are based on a federal index. Some examples of outside indexes are: the 6-month Certificate of Deposit (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 feature this cap, so they won't increase above a certain amount in a given period of time. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than two percent per year, even if the underlying index goes up by more than two percent. Sometimes an ARM has a "payment cap" which ensures your payment will not go above a fixed amount in a given year. The majority of ARMs also cap your rate over the duration of the loan.

ARMs most often feature the lowest, most attractive rates toward the beginning. They guarantee the lower rate from a month to ten years. You've likely read about 5/1 or 3/1 ARMs. For these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust. These loans are usually best for people who anticipate moving within three or five years. These types of ARMs benefit people who plan to move before the initial lock expires.

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 introductory rate expires. ARMs are risky when property values go down and borrowers are unable to sell or refinance their loan.

Have questions about mortgage loans? Call us at 8139881776. We answer questions about different types of loans every day.

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