Differences between fixed and adjustable loans

With a fixed-rate loan, your monthly payment never changes for the life of the mortgage. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but for the most part, payments on fixed rate loans don't increase much.

Your first few years of payments on a fixed-rate loan are applied primarily to pay interest. The amount applied to principal goes up slowly each month.

Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose these types of loans when interest rates are low and they wish to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at the best rate currently available. Call Financial Edge Mortgage Corp. at 425-508-9988 to learn more.

There are many types of Adjustable Rate Mortgages. Generally, interest rates on ARMs are determined by a federal index. Some examples of outside indexes are: the 6-month CD rate, the one-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 increases in monthly payments. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that guarantees your payment won't increase beyond a fixed amount in a given year. Plus, the great majority of adjustable programs feature a "lifetime cap" — your rate can't go over the capped percentage.

ARMs most often have the lowest rates at the beginning of the loan. They guarantee that rate for an initial period that varies greatly. You've likely heard of 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 loans are fixed for a certain number of years (3 or 5), then they adjust. These loans are best for borrowers who expect to move in three or five years. These types of ARMs most benefit people who plan to move before the initial lock expires.

You might choose an ARM to take advantage of a very low initial interest rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs can be risky if property values decrease and borrowers are unable to sell or refinance.

Have questions about mortgage loans? Call us at 425-508-9988. We answer questions about different types of loans every day.

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