Fixed versus adjustable loans

With a fixed-rate loan, your payment stays the same for the life of the mortgage. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but for the most part, payments on fixed rate loans vary little.

At the beginning of a a fixed-rate loan, most of your payment is applied to interest. That gradually reverses as the loan ages.

Borrowers can choose a fixed-rate loan to lock in a low interest rate. Borrowers select these types of loans because interest rates are low and they want 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 monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at the best rate currently available. Call Howard Financial at (610) 889-7467 to discuss how we can help.

Adjustable Rate Mortgages — ARMs, come in a great number of varieties. ARMs are generally adjusted twice a year, based on various indexes.

Most programs feature a cap that protects you from sudden monthly payment increases. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount the payment can increase in a given period. Plus, almost all ARM programs have a "lifetime cap" — this cap means that your rate can't ever exceed the capped amount.

ARMs usually start out at a very low rate that usually increases as the loan ages. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set for three or five years. After this period it adjusts every year. These kinds of loans are fixed for a number of years (3 or 5), then adjust. Loans like this are often best for people who expect to move in three or five years. These types of adjustable rate programs benefit people who will sell their house or refinance before the initial lock expires.

You might choose an ARM to get a very low introductory rate and count on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs are risky if property values decrease and borrowers can't sell or refinance.

Have questions about mortgage loans? Call us at (610) 889-7467. We answer questions about different types of loans every day.

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