Differences between adjustable and fixed rate loans

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With a fixed-rate loan, your payment doesn't change for the entire duration of the mortgage. The amount allocated for your principal (the actual loan amount) will increase, however, the amount you pay in interest will go down accordingly. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally payment amounts on your fixed-rate loan will increase very little.

Your first few years of payments on a fixed-rate loan are applied primarily to pay interest. That reverses as the loan ages.

Borrowers can choose a fixed-rate loan in order to lock in a low rate. People choose 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 into a fixed-rate loan can offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at a good rate. Call Primary Residential Mortgage Inc. at 540-433-6611 for details.

Adjustable Rate Mortgages — ARMs, come in a great number of varieties. Generally, the interest rates for ARMs are determined by an outside index. A few of these 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 are capped, which means they can't increase over a specific amount in a given period of time. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than a couple percent a year, even if the index the rate is based on goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount the monthly payment can increase in one period. Almost all ARMs also cap your interest rate over the life of the loan period.

ARMs most often feature the lowest rates at the start. They guarantee the lower rate from a month to ten years. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are often best for people who anticipate moving in three or five years. These types of adjustable rate programs are best for people who plan to sell their house or refinance before the initial lock expires.

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

Have questions about mortgage loans? Call us at 540-433-6611. It's our job to answer these questions and many others, so we're happy to help!

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