Differences between adjustable and fixed loans

A fixed-rate loan features a fixed payment amount over the life of your mortgage. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part monthly payments on a fixed-rate mortgage will be very stable.

Your first few years of payments on a fixed-rate loan are applied mostly to pay interest. The amount applied to principal increases up gradually each month.

Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select fixed-rate loans because interest rates are low and they want to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at the best rate currently available. Call Power Purchase Mortgage at (800)593-0143 to discuss how we can help.

Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs are normally adjusted twice a year, based on various indexes.

The majority of Adjustable Rate Mortgages feature this cap, which means they can't go up over a specified amount in a given period of time. Some ARMs can't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that ensures that your payment can't increase beyond a fixed amount in a given year. In addition, almost all ARM programs feature a "lifetime cap" — the rate will never go over the cap amount.

ARMs most often feature the lowest, most attractive rates toward the beginning. They provide that interest rate for an initial period that varies greatly. You've probably read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are best for people who expect to move in three or five years. These types of ARMs benefit borrowers who will sell their house or refinance before the initial lock expires.

Most people who choose ARMs do so when they want to get lower introductory rates and don't plan on remaining in the house for any longer than this initial low-rate period. 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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