Fixed versus adjustable rate loans

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With a fixed-rate loan, your payment never changes for the entire duration of the loan. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but generally, payment amounts on these types of loans don't increase much.

When you first take out a fixed-rate mortgage loan, most of your payment goes 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 want to lock in at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, I'll be glad to help you lock in a fixed-rate at the best rate currently available. Call me at 623-202-3142 for details.

There are many different kinds of Adjustable Rate Mortgages. Generally, interest for ARMs are determined by 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 Adjustable Rate Mortgages feature this cap, so they won't increase above a specified amount in a given period. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which ensures that your payment will not go above a certain amount in a given year. Plus, almost all ARM programs have a "lifetime cap" — your interest rate won't exceed the cap amount.

ARMs usually start at a very low rate that usually increases as the loan ages. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust. Loans like this are usually best for borrowers who anticipate moving within three or five years. These types of ARMs benefit borrowers who will sell their house or refinance before the loan adjusts.

Most people who choose ARMs do so when they want to get lower introductory rates and don't plan to stay in the house longer than this introductory low-rate period. ARMs are risky if property values go down and borrowers cannot sell or refinance their loan.

Have questions about mortgage loans? Call me at 623-202-3142. I answer questions about different types of loans every day.

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