Adjustable versus fixed rate loans

With a fixed-rate loan, your monthly payment never changes for the entire duration of the loan. The amount of the payment that goes to principal (the actual loan amount) goes up, but your interest payment will decrease in the same amount. The property tax and homeowners insurance will go up over time, but in general, payments on these types of loans change little over the life of the loan.

At the beginning of a a fixed-rate mortgage loan, most of your payment goes toward interest. That reverses as the loan ages.

You can choose a fixed-rate loan to lock in a low interest rate. Borrowers choose these types of loans because interest rates are low and they want to lock in this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at a good rate. Call Howard Financial at (610) 889-7467 to discuss your situation with one of our professionals.

There are many different kinds of Adjustable Rate Mortgages. Generally, the interest on ARMs are determined by a federal index. Some examples of outside indexes are: the 6-month CD rate, the 1 year rate on Treasure Securities, 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 monthly payment increases. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that guarantees that your payment won't go above a fixed amount in a given year. Most ARMs also cap your rate over the life of the loan.

ARMs usually start out at a very low rate that usually increases as the loan ages. You've probably read about 5/1 or 3/1 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 a number of years (3 or 5), then they adjust. These loans are 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 initial lock expires.

Most borrowers who choose ARMs do so when they want to get lower introductory rates and don't plan to remain in the house for any 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 us at (610) 889-7467. We answer questions about different types of loans every day.

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