Fixed versus adjustable rate loans

With a fixed-rate loan, your payment doesn't change for the entire duration of your mortgage. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance will go up over time, but generally, payment amounts on these types of loans don't increase much.

Your first few years of payments on a fixed-rate loan go mostly to pay interest. This proportion gradually reverses as the loan ages.

You can choose a fixed-rate loan to lock in a low interest rate. People choose these types of loans when interest rates are low and they wish to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at a good rate. Call Stepping Stone Mortgage at (541) 683-3300 to discuss your situation with one of our professionals.

Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, interest for ARMs are based on an outside index. Some examples of outside indexes 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 programs feature a "cap" that protects borrowers from sudden increases in monthly payments. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that ensures that your payment can't go above a fixed amount in a given year. Plus, the great majority of adjustable programs have a "lifetime cap" — this means that the interest rate can't go over the capped percentage.

ARMs most often feature their lowest rates at the beginning of the loan. They guarantee the lower interest rate from a month to ten years. You've probably 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 loans are fixed for a certain number of years (3 or 5), then they adjust. Loans like this are usually best for people 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.

Most people who choose ARMs choose them when they want to take advantage of lower introductory rates and don't plan to remain in the home for any longer than the introductory low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates when they cannot sell their home or refinance with a lower property value.

Have questions about mortgage loans? Call us at (541) 683-3300. It's our job to answer these questions and many others, so we're happy to help!

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