Fixed versus adjustable loans

With a fixed-rate loan, your monthly payment never changes for the entire duration of the mortgage. The amount that goes for your principal (the loan amount) goes up, however, the amount you pay in interest will decrease in the same amount. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but in general, payments on fixed rate loans change little over the life of the loan.

Early in a fixed-rate loan, most of your monthly payment pays interest, and a significantly smaller percentage goes to principal. The amount applied to your principal amount increases up gradually each month.

Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select fixed-rate loans when interest rates are low and they wish to lock in at this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), 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 different kinds of Adjustable Rate Mortgages. Generally, interest rates for ARMs are based on an outside index. A few of these are: the 6-month 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 Adjustable Rate Mortgages feature this cap, so they can't increase over a certain amount in a given period of time. Some ARMs can't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that ensures your payment can't increase beyond a certain amount over the course of a given year. Most ARMs also cap your interest rate over the life of the loan period.

ARMs usually start at a very low rate that usually increases as the loan ages. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are best for people who expect to move within three or five years. These types of ARMs are best for borrowers who will move before the loan adjusts.

You might choose an Adjustable Rate Mortgage to take advantage of a very low initial rate and plan on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs can be risky in a down market because homeowners can get stuck with rates that go up when 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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