Differences between fixed and adjustable loans

With a fixed-rate loan, your payment remains the same for the life of your mortgage. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance will increase over time, but generally, payments on fixed rate loans change little over the life of the loan.

Early in a fixed-rate loan, most of your payment goes toward interest, and a much smaller percentage toward principal. The amount paid toward principal increases up gradually each month.

You can choose a fixed-rate loan to lock in a low rate. People choose fixed-rate loans because interest rates are low and they wish to lock in this lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at a favorable rate. Call Stepping Stone Mortgage at (541) 683-3300 for details.

There are many kinds of Adjustable Rate Mortgages. Generally, the interest rates for ARMs are based on a federal index. Some examples of outside indexes are: the 6-month CD rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

The majority of Adjustable Rate Mortgages are capped, which means they can't go up above a specified amount in a given period. Some ARMs can't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which ensures your payment won't go above a fixed amount over the course of a given year. Additionally, almost all ARM programs have a "lifetime cap" — this cap means that the rate can't ever go over the capped amount.

ARMs most often feature the lowest, most attractive rates toward the start. They provide the lower interest rate for an initial period that varies greatly. You've probably read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then adjust. Loans like this are often best for borrowers who expect to move within three or five years. These types of adjustable rate loans most benefit people who plan to move before the initial lock expires.

You might choose an Adjustable Rate Mortgage to take advantage of a very low introductory interest rate and plan on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs are risky if property values decrease and borrowers cannot sell their home or refinance their loan.

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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