Fixed versus adjustable loans
With a fixed-rate loan, your payment stays the same for the life of the loan. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance will go up over time, but in general, payment amounts on these types of loans don't increase much.
When you first take out a fixed-rate mortgage loan, most of the payment goes toward interest. That reverses as the loan ages.
You 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 this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater 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 a favorable rate. Call Financial Edge Mortgage Corp. at 425-508-9988 to learn more.
There are many kinds of Adjustable Rate Mortgages. Generally, interest rates for ARMs are determined by a federal index. Some examples of outside indexes are: the 6-month Certificate of Deposit (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 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 a couple percent per year, even though the underlying index increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount that the monthly payment can go up in one period. Almost all ARMs also cap your rate over the life of the loan period.
ARMs most often feature their lowest, most attractive rates toward the beginning. They guarantee that rate from a month to ten years. You've likely read about 5/1 or 3/1 ARMs. In these loans, the initial rate is set for three or five years. It then adjusts every year. These kinds of loans are fixed for 3 or 5 years, then adjust. These loans are often best for borrowers who expect to move within three or five years. These types of adjustable rate loans benefit people who plan to sell their house or refinance before the loan adjusts.
You might choose an ARM to get a very low introductory interest rate and plan on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs are risky if property values go down and borrowers cannot sell or refinance.
Have questions about mortgage loans? Call us at 425-508-9988. It's our job to answer these questions and many others, so we're happy to help!
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