Fixed versus adjustable rate loans

A fixed-rate loan features a fixed payment amount for the entire duration of your mortgage. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but in general, payments on these types of loans vary little.

Early in a fixed-rate loan, a large percentage of your payment pays interest, and a significantly smaller percentage toward principal. The amount paid toward principal goes up slowly each month.

Borrowers can 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 at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call Power Purchase Mortgage at (800)593-0143 for details.

Adjustable Rate Mortgages — ARMs, come in even more varieties. Generally, interest for ARMs are based on a federal index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARM programs have a cap that protects you from sudden monthly payment increases. Some ARMs won't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that guarantees that your payment won't go above a fixed amount in a given year. Plus, the great majority of ARM programs have a "lifetime cap" — this means that your interest rate will never exceed the capped percentage.

ARMs most often have their lowest, most attractive rates at the start of the loan. They usually provide the lower interest rate for an initial period that varies greatly. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are usually best for borrowers who anticipate moving in three or five years. These types of adjustable rate programs benefit borrowers who will sell their house or refinance before the initial lock expires.

You might choose an Adjustable Rate Mortgage to take advantage of a very low introductory interest rate and plan on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs are risky when property values go down and borrowers cannot sell or refinance their loan.

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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