Differences between fixed and adjustable loans

A fixed-rate loan features a fixed payment amount for the entire duration of the mortgage. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but in general, payment amounts on these types of loans change little over the life of the loan.

Your first few years of payments on a fixed-rate loan go mostly to pay interest. The amount applied to your principal amount goes up slowly each month.

Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select fixed-rate loans because interest rates are low and they want to lock in at the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater monthly payment stability. 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 Valley Savers Mortgage, LLC at (602) 332-9544 for details.

There are many different kinds of Adjustable Rate Mortgages. Generally, the interest for ARMs are determined by an outside index. A few of these are: the 6-month CD rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARM programs have a "cap" that protects borrowers from sudden monthly payment increases. There may be a cap on interest rate increases over the course of a year. For example: no more than a couple percent per year, even though the index the rate is based on goes up by more than two percent. Sometimes an ARM has a "payment cap" which guarantees that your payment can't go above a fixed amount in a given year. The majority of ARMs also cap your rate over the life of the loan period.

ARMs usually start at a very low rate that usually increases as the loan ages. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is set for three or five years. After this period it 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 often best for borrowers who anticipate moving in three or five years. These types of adjustable rate programs are best for borrowers who will move before the loan adjusts.

You might choose an ARM to get a lower initial interest rate and count on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs can be risky if property values decrease and borrowers cannot sell their home or refinance.

Have questions about mortgage loans? Call us at (602) 332-9544. It's our job to answer these questions and many others, so we're happy to help!

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