Adjustable versus fixed loans

With a fixed-rate loan, your monthly payment doesn't change for the entire duration of your mortgage. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance will increase over time, but for the most part, payments on these types of loans don't increase much.

Early in a fixed-rate loan, most of your monthly payment pays interest, and a significantly smaller part toward principal. 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 rate. Borrowers choose these types of loans when interest rates are low and they want to lock in at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at a favorable rate. Call Triumph Mortgage Inc at 8327302000 for details.

Adjustable Rate Mortgages — ARMs, come in even more varieties. Generally, the interest for ARMs are based on 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 ARMs feature this cap, which means they can't increase above a specified amount in a given period. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which guarantees that your payment won't increase beyond a fixed amount in a given year. In addition, almost all ARM programs have a "lifetime cap" — your interest rate can't ever exceed the capped amount.

ARMs most often have the lowest, most attractive rates at the start. They usually guarantee that rate for an initial period that varies greatly. 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. It then adjusts every year. These kinds of loans are fixed for a certain number of years (3 or 5), then adjust after the initial period. These loans are often best for people who expect to move in three or five years. These types of adjustable rate programs benefit people who plan to sell their house or refinance before the initial lock expires.

Most people who choose ARMs choose them because they want to take advantage of lower introductory rates and do not plan to remain in the home for any longer than the initial low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates if they cannot sell their home or refinance at the lower property value.

Have questions about mortgage loans? Call us at 8327302000. We answer questions about different types of loans every day.

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