Fixed versus adjustable loans

A fixed-rate loan features a fixed payment amount over the life of the loan. The property tax and homeowners insurance will go up over time, but generally, payments on fixed rate loans don't increase much.

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

Borrowers can choose a fixed-rate loan in order to lock in a low rate. Borrowers choose these types of loans when interest rates are low and they wish to lock in at this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at a good rate. Call Power Purchase Mortgage at (800)593-0143 to learn more.

Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. Generally, the interest on ARMs are based on an outside index. Some examples of outside indexes are: the 6-month 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 programs have a "cap" that protects borrowers from sudden monthly payment increases. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than two percent per year, even though the index the rate is based on increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount that the monthly payment can increase in a given period. Most ARMs also cap your rate over the life of the loan period.

ARMs usually start out at a very low rate that may increase over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for a certain number of years (3 or 5), then adjust. Loans like this are often best for borrowers who anticipate moving in three or five years. These types of adjustable rate loans are best for borrowers who will move before the initial lock expires.

You might choose an ARM to take advantage of a lower initial interest rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs are risky when property values go down and borrowers can't sell their home or refinance.

Have questions about mortgage loans? Call us at (800)593-0143. It's our job to answer these questions and many others, so we're happy to help!

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