Adjustable versus fixed rate loans

With a fixed-rate loan, your monthly payment doesn't change for the life of your loan. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance will increase over time, but for the most part, payment amounts on these types of loans change little over the life of the loan.

During the early amortization period of a fixed-rate loan, a large percentage of your monthly payment pays interest, and a significantly smaller percentage toward principal. The amount applied to principal increases up slowly every month.

Borrowers can choose a fixed-rate loan to lock in a low interest rate. Borrowers choose fixed-rate loans because interest rates are low and they wish to lock in at this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more monthly payment stability. 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 Bob Rutledge Mortgage at 3149139678 to learn more.

Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. Generally, interest rates on ARMs are determined by a federal index. A few of these are: the 6-month Certificate of Deposit (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 ARMs are capped, so they can't go up over a specified amount in a given period. Some ARMs can't increase more than two percent per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount your monthly payment can increase in one period. Additionally, the great majority of ARM programs feature a "lifetime cap" — your rate can't go over the cap percentage.

ARMs usually start at a very low rate that usually increases over time. You've likely read about 5/1 or 3/1 ARMs. For 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 they adjust. These loans are usually best for people who expect to move in three or five years. These types of adjustable rate programs benefit borrowers who will sell their house or refinance before the initial lock expires.

Most borrowers who choose ARMs choose them when they want to take advantage of lower introductory rates and do not plan on remaining in the house longer than this initial low-rate period. ARMs can be risky if property values go down and borrowers cannot sell or refinance their loan.

Have questions about mortgage loans? Call us at 3149139678. We answer questions about different types of loans every day.

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