Differences between adjustable and fixed rate loans

A fixed-rate loan features a fixed payment over the life of your loan. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally payment amounts on your fixed-rate mortgage will be very stable.

During the early amortization period of a fixed-rate loan, most of your monthly payment goes toward interest, and a much smaller part toward principal. The amount paid toward your principal amount goes up gradually each month.

You can choose a fixed-rate loan in order 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 the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at the best rate currently available. Call Triumph Mortgage Inc at 8327302000 to discuss how we can help.

Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, interest rates on ARMs are based on an outside index. A few of these are: the 6-month CD rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

The majority of ARMs feature this cap, so they won't increase above a specific amount in a given period of time. Some ARMs can't adjust more than 2% 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 that the monthly payment can go up in one period. In addition, almost all adjustable programs have a "lifetime cap" — your interest rate will never exceed the cap amount.

ARMs usually start out at a very low rate that usually increases over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For 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 3 or 5 years, then they adjust. Loans like this are usually best for people who expect to move in three or five years. These types of ARMs most benefit people who will sell their house or refinance before the loan adjusts.

Most borrowers who choose ARMs choose them when they want to get lower introductory rates and do not plan on remaining in the home longer than this introductory low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates if they can't sell their home or refinance with a lower property value.

Have questions about mortgage loans? Call us at 8327302000. It's our job to answer these questions and many others, so we're happy to help!

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