Differences between adjustable and fixed loans

With a fixed-rate loan, your payment never changes for the life of your loan. The portion of the payment that goes for principal (the actual loan amount) will go up, however, the amount you pay in interest will go down accordingly. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part payments for a fixed-rate mortgage will increase very little.

Early in a fixed-rate loan, a large percentage of your payment pays interest, and a significantly smaller part toward principal. That reverses itself as the loan ages.

Borrowers might choose a fixed-rate loan in order to lock in a low rate. Borrowers choose fixed-rate loans when interest rates are low and they wish to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call Carter Financial Solutions at 8668408745 to learn more.

There are many different types of Adjustable Rate Mortgages. Generally, interest for ARMs are determined by a federal 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.

Most programs feature a cap that protects you from sudden monthly payment increases. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than two percent a year, even though the underlying index increases by more than two percent. Sometimes an ARM has a "payment cap" that guarantees that your payment can't increase beyond a fixed amount over the course of a given year. In addition, the great majority of adjustable programs feature a "lifetime cap" — this cap means that your interest rate can't go over the cap amount.

ARMs most often feature the lowest rates at the beginning. They usually provide that interest rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is fixed for three or five years. It then adjusts every year. These 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 anticipate moving within three or five years. These types of adjustable rate programs are best for people who plan to sell their house or refinance before the loan adjusts.

You might choose an Adjustable Rate Mortgage to take advantage of a very low initial interest rate and plan on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates when they cannot sell or refinance at the lower property value.

Have questions about mortgage loans? Call us at 8668408745. It's our job to answer these questions and many others, so we're happy to help!

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Carter Financial Solutions

2291 W. March Ln Suite A100
Stockton, CA 95207