Differences between fixed and adjustable loans

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

Your first few years of payments on a fixed-rate loan go primarily to pay interest. The amount applied to your principal amount increases up slowly each month.

Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. People choose fixed-rate loans when interest rates are low and they wish to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at the best rate currently available. Call Executive Lending Group, LLC at 8165258000 for details.

Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. Generally, the interest rates on ARMs are determined by a federal index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the one-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 borrowers from sudden increases in monthly payments. 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 per year, even if the index the rate is based on goes up by more than two percent. Sometimes an ARM has a "payment cap" that guarantees your payment will not increase beyond a certain amount over the course of a given year. Almost all ARMs also cap your interest rate over the duration of the loan period.

ARMs usually start out at a very low rate that usually increases over time. You've likely read about 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. It then adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust. Loans like this are often best for people who anticipate moving within three or five years. These types of adjustable rate loans most benefit borrowers who plan to move before the loan adjusts.

Most borrowers who choose ARMs do so when they want to get lower introductory rates and don't plan on staying in the house for any longer than this introductory low-rate period. ARMs can be risky in a down market because homeowners can get stuck with increasing rates if they can't sell their home or refinance with a lower property value.

Have questions about mortgage loans? Call us at 8165258000. It's our job to answer these questions and many others, so we're happy to help!

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