Adjustable versus fixed rate loans

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

Your first few years of payments on a fixed-rate loan are applied mostly to pay interest. This proportion gradually reverses as the loan ages.

Borrowers might choose a fixed-rate loan to lock in a low rate. Borrowers choose fixed-rate loans because interest rates are low and they wish to lock in at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at a good rate. Call Dove Lending Group, Inc. at 877-210-6899 for details.

Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. Generally, the interest on ARMs are determined by a federal index. A few of these 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 ARM programs feature a cap that protects you from sudden monthly payment increases. Some ARMs can't increase more than 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that the payment can go up in a given period. Most ARMs also cap your rate over the duration of the loan.

ARMs most often feature their lowest rates at the start. They usually provide the lower interest rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then adjust. Loans like this are usually best for borrowers who anticipate moving within three or five years. These types of adjustable rate programs are best for people who will sell their house or refinance before the initial lock expires.

Most people who choose ARMs choose them when they want to get lower introductory rates and don't plan to remain in the home for any longer than this initial low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up when they cannot sell their home or refinance with a lower property value.

Have questions about mortgage loans? Call us at 877-210-6899. We answer questions about different types of loans every day.