Differences between adjustable and fixed rate loans

A fixed-rate loan features the same payment for the entire duration of your mortgage. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally payment amounts for a fixed-rate loan will increase very little.

Your first few years of payments on a fixed-rate loan are applied primarily toward interest. The amount paid toward principal goes up slowly each month.

You might choose a fixed-rate loan to lock in a low interest rate. Borrowers select fixed-rate loans when interest rates are low and they wish to lock in at the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at the best rate currently available. Call Stepping Stone Mortgage at (541) 683-3300 to discuss how we can help.

Adjustable Rate Mortgages — ARMs, come in many varieties. ARMs are generally adjusted twice a year, based on various indexes.

Most programs feature a "cap" that protects you from sudden monthly payment increases. Some ARMs won't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that guarantees that your payment won't go above a fixed amount over the course of a given year. In addition, the great majority of adjustable programs feature a "lifetime cap" — the interest rate won't go over the cap amount.

ARMs most often feature the lowest, most attractive rates toward the start. They guarantee that rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are usually best for borrowers who expect to move in three or five years. These types of adjustable rate programs most benefit people who will sell their house or refinance before the loan adjusts.

Most borrowers who choose ARMs do so when they want to get lower introductory rates and do not plan to remain in the house for any longer than this introductory low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates if they can't sell 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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