Differences between adjustable and fixed rate loans

A fixed-rate loan features the same payment over the life of your loan. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. For the most part payment amounts on your fixed-rate mortgage will increase very little.

At the beginning of a a fixed-rate mortgage loan, the majority the payment is applied to interest. This proportion reverses itself as the loan ages.

Borrowers might choose a fixed-rate loan to lock in a low rate. People select fixed-rate loans when interest rates are low and they want to lock in the low 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 assist you in locking a fixed-rate at a good rate. Call The Mortgage Partner at 8888107112 to discuss how we can help.

There are many different kinds of Adjustable Rate Mortgages. Generally, 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 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most programs feature a "cap" that protects you from sudden monthly payment increases. There may be a cap on interest rate variances over the course of a year. For example: no more than a couple percent a year, even though the index the rate is based on goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that the payment can go up in one period. Plus, the great majority of ARMs have a "lifetime cap" — this means that the interest rate can't ever exceed the cap amount.

ARMs most often have the lowest, most attractive rates at the start. They usually provide that interest rate for an initial period that varies greatly. You've probably heard of 5/1 or 3/1 ARMs. For these loans, the initial rate is set for three or five years. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then they adjust. Loans like this are best for people who anticipate moving in three or five years. These types of adjustable rate loans benefit people who will sell their house or refinance before the loan adjusts.

Most people who choose ARMs choose them because they want to get lower introductory rates and don't plan to stay in the house for any longer than the introductory low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates if they cannot sell their home or refinance at the lower property value.

Have questions about mortgage loans? Call us at 8888107112. It's our job to answer these questions and many others, so we're happy to help!

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The Mortgage Partner

30100 Crown Valley Parkway, Suite 11
Laguna Niguel, CA 92677