Adjustable versus fixed loans

With a fixed-rate loan, your monthly payment never changes for the life of your loan. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance will increase over time, but generally, 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 are applied mostly to pay interest. As you pay , more of your payment is applied to principal.

You can choose a fixed-rate loan to lock in a low interest rate. Borrowers choose fixed-rate loans when interest rates are low and they want to lock in the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at the best rate currently available. Call Chris Caggiano - Grand Oaks Funding, LLC at (718) 477-4405 to discuss how we can help.

Adjustable Rate Mortgages — ARMs, come in even more varieties. Generally, interest rates on ARMs are based on 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 ARMs are capped, which means they can't go up over a specific amount in a given period of time. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than two percent a year, even if the underlying index increases by more than two percent. Sometimes an ARM features a "payment cap" that ensures your payment will not increase beyond a certain amount over the course of a given year. Almost all ARMs also cap your interest rate over the duration of the loan.

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. In these loans, the initial rate is set for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are best for people who anticipate moving within three or five years. These types of adjustable rate loans most benefit borrowers who plan to sell their house or refinance before the initial lock expires.

Most people who choose ARMs do so when they want to take advantage of lower introductory rates and do not plan to stay in the home for any longer than this introductory low-rate period. ARMs can be risky in a down market because homeowners could be stuck with rates that go up if they cannot sell their home or refinance with a lower property value.

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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