Adjustable versus fixed rate loans

A fixed-rate loan features a fixed payment over the life of your loan. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part monthly payments for a fixed-rate mortgage will be very stable.

At the beginning of a a fixed-rate loan, the majority the payment goes toward interest. The amount paid toward your principal amount goes up slowly every month.

You might choose a fixed-rate loan in order to lock in a low rate. Borrowers select fixed-rate loans when interest rates are low and they want to lock in the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at a favorable rate. Call Chris Caggiano - Grand Oaks Funding, LLC at (718) 477-4405 to discuss your situation with one of our professionals.

There are many different kinds of Adjustable Rate Mortgages. Generally, the interest on ARMs are based on 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 programs have a cap that protects you from sudden increases in monthly payments. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that guarantees that your payment can't increase beyond a fixed amount over the course of a given year. Almost all ARMs also cap your rate over the duration of the loan.

ARMs most often have their lowest rates toward the start. They provide that interest rate for an initial period that varies greatly. You may hear people talking 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. Loans like this are often best for borrowers who anticipate moving within three or five years. These types of adjustable rate programs benefit people who plan to move before the loan adjusts.

Most people who choose ARMs choose them because they want to get lower introductory rates and don't plan to remain in the home for any longer than the initial low-rate period. ARMs can be risky if property values go down and borrowers are unable to sell or refinance.

Have questions about mortgage loans? Call us at (718) 477-4405. We answer questions about different types of loans every day.

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