Fixed versus adjustable loans

With a fixed-rate loan, your payment stays the same for the life of the mortgage. The portion that goes for principal (the amount you borrowed) goes up, but the amount you pay in interest will go down 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 don't increase much.

Your first few years of payments on a fixed-rate loan are applied primarily toward interest. As you pay on the loan, more of your payment is applied to principal.

Borrowers might choose a fixed-rate loan to lock in a low interest rate. Borrowers choose fixed-rate loans when interest rates are low and they want to lock in this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at the best rate currently available. Call Pinnacle Lending Group, Inc. at 7027302085 for details.

There are many different kinds of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.

Most Adjustable Rate Mortgages are capped, so they won't increase above a specified amount in a given period. There may be a cap on how much your interest rate can increase in one period. For example: no more than a couple percent a year, even if the index the rate is based on increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount the payment can go up in one period. Plus, almost all ARMs feature a "lifetime cap" — this cap means that the rate can't go over the cap percentage.

ARMs usually start out at a very low rate that may increase as the loan ages. You've likely read about 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 loans are fixed for 3 or 5 years, then adjust. Loans like this are often best for borrowers who expect to move in three or five years. These types of adjustable rate loans most benefit people who will move before the initial lock expires.

Most borrowers who choose ARMs choose them because they want to take advantage of lower introductory rates and don't plan to stay in the home longer than this introductory low-rate period. ARMs can be risky when property values go down and borrowers cannot sell their home or refinance their loan.

Have questions about mortgage loans? Call us at 7027302085. We answer questions about different types of loans every day.

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