Adjustable versus fixed loans

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With a fixed-rate loan, your monthly payment never changes for the entire duration of your mortgage. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally payments for a fixed-rate loan will increase very little.

Your first few years of payments on a fixed-rate loan are applied mostly to pay interest. The amount paid toward your principal amount increases up slowly each month.

You can choose a fixed-rate loan to lock in a low rate. Borrowers select fixed-rate loans when interest rates are low and they wish to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more 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 Rainbow Mortgage Inc. at 952-985-4113 for details.

Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. ARMs are normally adjusted twice a year, based on various indexes.

Most ARM programs have a "cap" that protects you from sudden monthly payment increases. There may be a cap on how much your interest rate can go up in one period. For example: no more than two percent a year, even though the index the rate is based on goes up by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount the payment can increase in a given period. Most ARMs also cap your rate over the life of the loan.

ARMs most often have their lowest, most attractive rates toward the start of the loan. They provide that rate from a month to ten years. You've probably read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed 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 people who anticipate moving within three or five years. These types of adjustable rate programs are best for people who will move before the initial lock expires.

Most borrowers who choose ARMs do so because they want to take advantage of lower introductory rates and do not plan to remain in the house for any longer than the introductory low-rate period. ARMs can be risky in a down market because homeowners could be stuck with increasing rates if they can't sell or refinance with a lower property value.

Have questions about mortgage loans? Call us at 952-985-4113. It's our job to answer these questions and many others, so we're happy to help!