Fixed versus adjustable loans

With a fixed-rate loan, your payment never changes for the entire duration of the mortgage. 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, payments on fixed rate loans vary little.

Your first few years of payments on a fixed-rate loan go mostly toward interest. This proportion reverses as the loan ages.

You might choose a fixed-rate loan to lock in a low interest rate. People select fixed-rate loans when interest rates are low and they wish to lock in the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at the best rate currently available. Call American Hero Mortgage at 754-202-4376 to discuss your situation with one of our professionals.

Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. Generally, interest rates for ARMs are determined by 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 ARM programs feature a "cap" that protects you from sudden increases in monthly payments. Some ARMs can't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which guarantees your payment can't go above a certain amount in a given year. In addition, almost all ARMs feature a "lifetime cap" — the interest rate can't go over the cap amount.

ARMs most often have their lowest rates at the start. They usually guarantee the lower rate for an initial period that varies greatly. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is fixed for three or five years. It then adjusts every year. These loans are fixed for a number of years (3 or 5), then they adjust after the initial period. Loans like this are usually best for people who anticipate moving within three or five years. These types of ARMs are best for borrowers who plan to move before the loan adjusts.

Most borrowers who choose ARMs do so because they want to get lower introductory rates and don't plan to stay in the home for any longer than the introductory low-rate period. ARMs are risky if property values decrease and borrowers cannot sell or refinance their loan.

Have questions about mortgage loans? Call us at 754-202-4376. We answer questions about different types of loans every day.

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