Differences between adjustable and fixed rate loans

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

Your first few years of payments on a fixed-rate loan go primarily toward interest. As you pay , more of your payment is applied to principal.

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 wish to lock in at the low 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 can assist you in locking a fixed-rate at the best rate currently available. Call Chris Caggiano - Grand Oaks Funding, LLC at (718) 477-4405 for details.

Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. ARMs usually adjust every six months, based on various indexes.

The majority of ARMs are capped, so they won't go up over a certain amount in a given period of time. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that ensures that your payment can't increase beyond a certain amount in a given year. Plus, almost all ARM programs feature a "lifetime cap" — your interest rate won't exceed the cap amount.

ARMs usually start out at a very low rate that may increase over time. 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. It then adjusts every year. These loans are fixed for a number of years (3 or 5), then they adjust after the initial period. Loans like this are usually best for borrowers who expect to move within three or five years. These types of adjustable rate programs benefit people who plan to sell their house or refinance before the loan adjusts.

You might choose an ARM to get a very low initial rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. ARMs are risky when property values decrease and borrowers can't 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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