Differences between fixed and adjustable rate loans

A fixed-rate loan features the same payment over the life of your loan. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally payment amounts on a fixed-rate loan will be very stable.

During the early amortization period of a fixed-rate loan, a large percentage of your payment goes toward interest, and a much smaller part goes to principal. The amount applied to principal goes up gradually each month.

Borrowers might choose a fixed-rate loan to lock in a low interest 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 with a fixed-rate loan can provide more stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call Chris Caggiano - Grand Oaks Funding, LLC at (718) 477-4405 to learn more.

There are many different kinds of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.

Most ARMs are capped, so they can't go up over a specified amount in a given period. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which guarantees your payment will not go above a certain amount over the course of a given year. In addition, almost all ARMs feature a "lifetime cap" — this means that your interest rate won't exceed the capped amount.

ARMs usually start out at a very low rate that usually increases as the loan ages. You've likely heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for a certain number of years (3 or 5), then adjust. These loans are usually best for borrowers who expect to move within three or five years. These types of adjustable rate programs most benefit people who plan to move before the initial lock expires.

You might choose an ARM to take advantage of a very low introductory interest rate and plan on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs are risky when property values go down and borrowers can't sell or refinance their loan.

Have questions about mortgage loans? Call us at (718) 477-4405. It's our job to answer these questions and many others, so we're happy to help!

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