Fixed versus adjustable rate loans

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With a fixed-rate loan, your monthly payment remains the same for the life of your loan. The amount of the payment allocated to principal (the amount you borrowed) increases, however, the amount you pay in interest will go down accordingly. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally monthly payments on your fixed-rate loan will be very stable.

Your first few years of payments on a fixed-rate loan are applied primarily toward interest. This proportion reverses itself as the loan ages.

Borrowers might choose a fixed-rate loan in order to lock in a low rate. Borrowers select fixed-rate loans because interest rates are low and they wish to lock in this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at a good rate. Call Straight Talk Lending at 714-737-6717 for details.

Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. Generally, the interest rates for ARMs are determined by an outside index. A few of these are: the 6-month 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 ARM programs have a cap that protects you from sudden monthly payment increases. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which ensures your payment won't increase beyond a certain amount over the course of a given year. In addition, almost all adjustable programs feature a "lifetime cap" — this cap means that your interest rate can't ever go over the cap amount.

ARMs most often feature the lowest rates at the start of the loan. They usually provide the lower interest rate from a month to ten years. You may have heard 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 loans are fixed for a certain number of years (3 or 5), then adjust. These loans are best for borrowers who anticipate moving within three or five years. These types of adjustable rate programs most benefit people who plan to sell their house or refinance before the loan adjusts.

Most people who choose ARMs do so when they want to take advantage of lower introductory rates and don't plan to remain in the house longer than the introductory low-rate period. ARMs are risky if property values decrease and borrowers can't sell their home or refinance their loan.

Have questions about mortgage loans? Call us at 714-737-6717. We answer questions about different types of loans every day.

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