Adjustable versus fixed rate loans

A fixed-rate loan features a fixed payment for the entire duration of your mortgage. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. For the most part payment amounts on a fixed-rate loan will be very stable.

Your first few years of payments on a fixed-rate loan go mostly to pay interest. This proportion gradually reverses as the loan ages.

Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select fixed-rate loans when interest rates are low and they want to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more monthly payment stability. 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. Generally, interest rates on ARMs are based on an outside index. A few of these are: the 6-month CD rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

The majority of Adjustable Rate Mortgages feature this cap, so they won't increase above a specified amount in a given period. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than two percent per year, even if the underlying index goes up by more than two percent. Sometimes an ARM features a "payment cap" that ensures that your payment can't go above a certain amount over the course of a given year. Almost all ARMs also cap your rate over the life of the loan.

ARMs most often have their lowest rates at the beginning. They usually provide the lower interest rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is fixed 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. Loans like this are often best for borrowers who anticipate moving within three or five years. These types of ARMs most benefit borrowers who plan to move before the initial lock expires.

You might choose an Adjustable Rate Mortgage to take advantage of a lower introductory interest rate and count on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky when property values go down and borrowers are unable to sell their home or refinance.

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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