Adjustable versus fixed rate loans

A fixed-rate loan features the same payment for the entire duration of the loan. The property taxes and homeowners insurance will increase over time, but for the most part, payments on fixed rate loans change little over the life of the loan.

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

You might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose fixed-rate loans because interest rates are low and they want to lock in the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at a good rate. Call Power Purchase Mortgage at (800)593-0143 to discuss how we can help.

There are many different kinds of Adjustable Rate Mortgages. Generally, the interest on ARMs are determined by a federal index. Some examples of outside indexes 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 programs have a cap that protects you from sudden monthly payment increases. 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 increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount that the monthly payment can increase in one period. In addition, the great majority of ARM programs feature a "lifetime cap" — this means that your rate can't go over the capped amount.

ARMs most often feature the lowest, most attractive rates toward the start. They usually provide that interest rate from a month to ten years. You've probably read about 5/1 or 3/1 ARMs. For these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust. Loans like this are usually best for borrowers who anticipate moving within three or five years. These types of adjustable rate programs most benefit borrowers who will sell their house or refinance before the loan adjusts.

Most borrowers who choose ARMs choose them when they want to get lower introductory rates and do not plan on remaining in the house longer than this introductory low-rate period. ARMs can be risky in a down market because homeowners could be stuck with rates that go up when they cannot sell or refinance at the lower property value.

Have questions about mortgage loans? Call us at (800)593-0143. We answer questions about different types of loans every day.

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