Fixed versus adjustable loans

A fixed-rate loan features the same payment amount for the entire duration of your mortgage. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part monthly payments for your fixed-rate loan will increase very little.

During the early amortization period of a fixed-rate loan, most of your monthly payment pays interest, and a much smaller part toward 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 want to lock in the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call Stepping Stone Mortgage at (541) 683-3300 to discuss your situation with one of our professionals.

Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. ARMs usually adjust twice a year, based on various indexes.

Most ARM programs feature a cap that protects borrowers from sudden monthly payment increases. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than two percent per year, even if the underlying index increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount that the payment can go up in a given period. Almost all ARMs also cap your rate over the life of the loan.

ARMs usually start out at a very low rate that may increase over time. 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 kinds of loans are fixed for a certain number of years (3 or 5), then adjust. These loans are best for people who expect to move in three or five years. These types of adjustable rate loans benefit borrowers who plan to sell their house or refinance before the loan adjusts.

Most people who choose ARMs choose them because they want to get lower introductory rates and do not plan on staying in the home longer than the introductory low-rate period. ARMs can be risky when housing prices go down because homeowners could be 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. We answer questions about different types of loans every day.

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