Adjustable versus fixed loans

A fixed-rate loan features a fixed payment for the entire duration of your loan. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but in general, payment amounts on fixed rate loans change little over the life of the loan.

Early in a fixed-rate loan, most of your monthly payment goes toward interest, and a much smaller percentage goes to principal. As you pay on the loan, more of your payment goes toward principal.

Borrowers can choose a fixed-rate loan to lock in a low interest rate. People select these types of loans because interest rates are low and they wish to lock in at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater stability 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 Triumph Mortgage Inc at 8327302000 to learn more.

Adjustable Rate Mortgages — ARMs, as we called them above — come in even more 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 one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most programs feature a cap that protects borrowers from sudden monthly payment increases. Some ARMs can't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that ensures that your payment won't increase beyond a fixed amount over the course of a given year. The majority of ARMs also cap your rate over the life of the loan period.

ARMs most often have the lowest, most attractive rates at the beginning. They guarantee the lower rate for an initial period that varies greatly. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is fixed 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 adjust after the initial period. Loans like this are best for borrowers who expect to move in three or five years. These types of ARMs are best for borrowers who plan to sell their house or refinance before the initial lock expires.

You might choose an Adjustable Rate Mortgage to get a lower introductory rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky if property values go down and borrowers cannot sell their home or refinance.

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

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