Differences between adjustable and fixed loans

A fixed-rate loan features a fixed payment amount for the entire duration of your loan. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part payment amounts for your fixed-rate loan will be very stable.

During the early amortization period of a fixed-rate loan, a large percentage of your monthly payment pays interest, and a significantly smaller part toward principal. That gradually reverses itself as the loan ages.

Borrowers can choose a fixed-rate loan in order to lock in a low rate. People select fixed-rate loans because interest rates are low and they want to lock in this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at a good rate. Call Valley Savers Mortgage, LLC at (602) 332-9544 to learn more.

There are many kinds of Adjustable Rate Mortgages. ARMs are normally adjusted every six months, based on various indexes.

Most ARM programs feature a "cap" that protects you from sudden monthly payment increases. Some ARMs can'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 will not go above a fixed amount in a given year. In addition, the great majority of adjustable programs feature a "lifetime cap" — this means that the rate won't go over the capped amount.

ARMs usually start out at a very low rate that may increase as the loan ages. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. It then adjusts every year. These types of loans are fixed for a number of years (3 or 5), then they adjust. Loans like this are best for borrowers who anticipate moving in three or five years. These types of ARMs benefit people who plan to move before the initial lock expires.

You might choose an ARM to get a very low initial rate and count on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs are risky if property values go down and borrowers cannot sell their home or refinance their loan.

Have questions about mortgage loans? Call us at (602) 332-9544. We answer questions about different types of loans every day.

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