Adjustable versus fixed loans

A fixed-rate loan features a fixed payment amount over the life of the loan. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally payments for your fixed-rate mortgage will increase very little.

Your first few years of payments on a fixed-rate loan go mostly toward interest. That reverses itself as the loan ages.

Borrowers might choose a fixed-rate loan in order to lock in a low rate. People select these types of loans because interest rates are low and they want to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at a favorable rate. Call Stepping Stone Mortgage at (541) 683-3300 to discuss how we can help.

Adjustable Rate Mortgages — ARMs, come in a great number of varieties. Generally, the interest on ARMs are determined by an outside index. A few of these are: the 6-month 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 ARMs feature this cap, so they won't increase over a certain amount in a given period. Some ARMs can't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which guarantees that your payment can't increase beyond a fixed amount over the course of a given year. Plus, the great majority of adjustable programs feature a "lifetime cap" — this means that your interest rate can't ever go over the capped amount.

ARMs usually start out at a very low rate that may increase over time. 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. It then adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust. Loans like this are usually best for borrowers who anticipate moving in three or five years. These types of adjustable rate loans are best for people who will move before the loan adjusts.

You might choose an ARM to get a lower initial rate and count on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates if they can't sell their home or refinance at the 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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