Differences between fixed and adjustable rate loans

A fixed-rate loan features the same payment amount for the entire duration of your loan. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but in general, payment amounts on fixed rate loans vary little.

Your first few years of payments on a fixed-rate loan go primarily to pay interest. As you pay on the loan, more of your payment goes toward principal.

You might choose a fixed-rate loan to lock in a low rate. People 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 monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at a good rate. Call Stepping Stone Mortgage at (541) 683-3300 to learn more.

Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. Generally, interest rates for ARMs are based on a federal index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARMs are capped, which means they can't go up above a certain amount in a given period. There may be a cap on how much your interest rate can increase in one period. For example: no more than a couple percent a year, even if the underlying index goes up by more than two percent. Sometimes an ARM features a "payment cap" that ensures your payment can't go above a fixed amount in a given year. Most ARMs also cap your rate over the duration of the loan period.

ARMs most often feature their lowest rates at the beginning. They provide the lower interest 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 fixed for three or five years. It then adjusts every year. These types of loans are fixed for a certain number of years (3 or 5), then they adjust after the initial period. These loans are best for borrowers who anticipate moving within three or five years. These types of ARMs most benefit borrowers who will move before the loan adjusts.

Most borrowers who choose ARMs do so because they want to take advantage of lower introductory rates and do not plan to stay in the home for any longer than this introductory low-rate period. ARMs can be risky in a down market because homeowners can get stuck with rates that go up when 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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