Differences between fixed and adjustable rate loans

A fixed-rate loan features a fixed payment over the life of the loan. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part monthly payments on a fixed-rate mortgage will be very stable.

At the beginning of a a fixed-rate mortgage loan, the majority the payment goes toward interest. The amount paid toward your principal amount goes up gradually each month.

You might choose a fixed-rate loan to lock in a low interest rate. People choose these types of loans because 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 greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at the best rate currently available. Call Bob Rutledge Mortgage at 3149139678 to discuss your situation with one of our professionals.

There are many kinds of Adjustable Rate Mortgages. Generally, the interest 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 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 you from sudden increases in monthly payments. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than a couple percent a year, even if the index the rate is based on goes up by more than two percent. Sometimes an ARM has a "payment cap" that ensures that your payment can't increase beyond a fixed amount in a given year. In addition, the great majority of adjustable programs feature a "lifetime cap" — your interest rate can't ever go over the cap amount.

ARMs most often feature their lowest rates at the start of the loan. They usually provide the lower interest 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 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 they adjust after the initial period. Loans like this are usually best for people who expect to move within three or five years. These types of adjustable rate loans most benefit people who plan to move before the loan adjusts.

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

Have questions about mortgage loans? Call us at 3149139678. It's our job to answer these questions and many others, so we're happy to help!

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