Differences between adjustable and fixed loans

A fixed-rate loan features a fixed payment amount over the life of your mortgage. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part payment amounts for your fixed-rate mortgage will be very stable.

At the beginning of a a fixed-rate loan, most of your payment is applied to interest. This proportion reverses as the loan ages.

Borrowers can choose a fixed-rate loan to lock in a low interest rate. Borrowers select fixed-rate loans because interest rates are low and they want to lock in at this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at a favorable rate. Call Stepping Stone Mortgage at (541) 683-3300 for details.

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

Most ARM programs have a cap that protects borrowers from sudden monthly payment increases. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than a couple percent per year, even though the underlying index increases by more than two percent. Sometimes an ARM has a "payment cap" which guarantees your payment won't increase beyond a certain amount in a given year. Most ARMs also cap your interest rate over the duration of the loan period.

ARMs usually start out at a very low rate that may increase as the loan ages. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then they adjust. Loans like this are best for borrowers who anticipate moving in three or five years. These types of adjustable rate loans are best for people who will sell their house or refinance before the loan adjusts.

You might choose an Adjustable Rate Mortgage to take advantage of a lower initial interest rate and count on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates if 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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