Adjustable versus fixed loans

A fixed-rate loan features a fixed payment over the life of the loan. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally monthly payments on your fixed-rate loan will be very stable.

When you first take out a fixed-rate mortgage loan, most of your payment goes toward interest. The amount paid toward your principal amount goes up gradually every month.

You can choose a fixed-rate loan in order to lock in a low rate. People choose these types of loans because interest rates are low and they wish 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 currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at a favorable rate. Call Stepping Stone Mortgage at (541) 683-3300 to learn more.

Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, the interest rates for ARMs are determined by a federal index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the 1 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 you from sudden monthly payment increases. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount your payment can go up in one period. In addition, almost all adjustable programs have a "lifetime cap" — your interest rate won't exceed the capped percentage.

ARMs most often feature the lowest rates at the beginning. They provide the lower rate for an initial period that varies greatly. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. It then 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 best for people who anticipate moving within three or five years. These types of ARMs most benefit borrowers who will move before the loan adjusts.

You might choose an ARM to get a lower initial interest rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs can be risky if property values go down and borrowers cannot sell their home or refinance.

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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