Differences between adjustable and fixed rate loans

A fixed-rate loan features the same payment over the life of the loan. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part payments on a fixed-rate mortgage will increase very little.

Early in a fixed-rate loan, a large percentage of your payment pays interest, and a significantly smaller part toward principal. As you pay on the loan, more of your payment goes toward principal.

You might choose a fixed-rate loan in order to lock in a low rate. People choose fixed-rate loans when interest rates are low and they want to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater consistency 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 Stepping Stone Mortgage at (541) 683-3300 for details.

Adjustable Rate Mortgages — ARMs, come in a great number of varieties. ARMs are normally adjusted twice a year, based on various indexes.

Most Adjustable Rate Mortgages feature this cap, so they won't increase above a specified amount in a given period. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that ensures that your payment can't increase beyond a certain amount over the course of a given year. In addition, almost all ARM programs have a "lifetime cap" — the rate can't ever go over the capped amount.

ARMs usually start at a very low rate that usually increases over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These loans are fixed for a certain number of years (3 or 5), then adjust after the initial period. Loans like this are often best for borrowers who anticipate moving within three or five years. These types of adjustable rate loans are best for borrowers who will sell their house or refinance before the loan adjusts.

You might choose an Adjustable Rate Mortgage to take advantage of a lower introductory interest rate and count on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs can be risky in a down market because homeowners could be stuck with increasing rates if they cannot sell or refinance at the lower property value.

Have questions about mortgage loans? Call us at (541) 683-3300. We answer questions about different types of loans every day.

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