Differences between fixed and adjustable loans

A fixed-rate loan features a fixed payment amount for the entire duration of your loan. The property taxes and homeowners insurance will go up over time, but generally, payments on fixed rate loans don't increase much.

During the early amortization period of a fixed-rate loan, a large percentage of your monthly payment goes toward interest, and a much smaller percentage toward principal. As you pay on the loan, more of your payment is applied to principal.

You might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose fixed-rate loans because interest rates are low and they want to lock in at this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking 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 on ARMs are based on an outside index. A few of these are: the 6-month Certificate of Deposit (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 ARMs feature this cap, which means they can't go up above a certain amount in a given period. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount that your payment can go up in a given period. Almost all ARMs also cap your rate over the duration of the loan.

ARMs usually start out at a very low rate that usually increases over time. You've probably heard of 5/1 or 3/1 ARMs. For these loans, the initial rate is set for three or five years. After this period it adjusts every year. These kinds of loans are fixed for a number of years (3 or 5), then they adjust after the initial period. Loans like this are best for people who expect to move within three or five years. These types of adjustable rate loans are best for people who will sell their house or refinance before the initial lock expires.

Most people who choose ARMs choose them when they want to take advantage of lower introductory rates and do not plan on remaining in the home for any longer than the initial low-rate period. ARMs can be risky in a down market because homeowners could be stuck with increasing rates if they can't sell or refinance with a lower property value.

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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