Adjustable versus fixed loans

With a fixed-rate loan, your payment stays the same for the entire duration of the loan. The amount of the payment allocated to principal (the loan amount) increases, however, the amount you pay in interest will decrease accordingly. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part monthly payments on your fixed-rate mortgage will be very stable.

When you first take out a fixed-rate loan, the majority your payment is applied to interest. As you pay on the loan, more of your payment goes toward principal.

Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose these types of loans when interest rates are low and they want to lock in this 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 can assist you in locking a fixed-rate at the best rate currently available. Call Arizona Wholesale Mortgage LLC at 602-369-8482 for details.

There are many kinds of Adjustable Rate Mortgages. Generally, interest rates on ARMs are determined by an outside 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 feature a cap that protects borrowers from sudden monthly payment increases. There may be a cap on how much your interest rate can increase in one period. For example: no more than two percent per year, even if the underlying index increases by more than two percent. Sometimes an ARM has a "payment cap" which ensures your payment won't increase beyond a fixed amount over the course of a given year. In addition, the great majority of ARM programs feature a "lifetime cap" — this cap means that the interest rate will never exceed the cap percentage.

ARMs usually start at a very low rate that may increase as the loan ages. 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. It then adjusts every year. These kinds of loans are fixed for a number of years (3 or 5), then adjust. Loans like this are usually best for borrowers who anticipate moving in three or five years. These types of ARMs most benefit people who plan to move before the loan adjusts.

You might choose an ARM to take advantage of a lower introductory rate and count on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs can be risky if property values go down and borrowers are unable to sell their home or refinance their loan.

Have questions about mortgage loans? Call us at 602-369-8482. We answer questions about different types of loans every day.

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