Fixed vs Adjusted

Differences between fixed and adjustable loans

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There are two main types of interest rates for mortgage loans. A fixed-rate loan and an Adjustable Rate Mortgage.

A fixed-rate loan features a fixed payment amount for the entire duration of the mortgage. The property tax and homeowners insurance will increase over time, but generally, payments on these types of loans don't increase much.

Early in a fixed-rate loan, most of your monthly payment goes toward interest, and a significantly smaller percentage goes to the principal. As you pay on the loan, more of your payment is applied to the 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 want to lock in at the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more stability in monthly payments.

If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed rate at a good rate. Call Destiny Six Financial at (619) 825-9560 to discuss how we can help.

Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. Generally, interest in ARMs is based on an outside index. Some examples of outside indexes are the 6-month Certificate of Deposit (CD) rate, the 1-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), and others.

Most programs have a "cap" that protects you from sudden monthly payment increases. Your ARM may feature a cap on how much your interest rate can increase in one period. For example, no more than a couple percent a year, even though the underlying index increases by more than two percent.

Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount the payment can increase in a given period. In addition, almost all ARMs feature a "lifetime cap" — your interest rate won't exceed the capped amount.

ARMs most often feature the lowest, most attractive rates at the beginning. They guarantee a lower rate for an initial period that varies greatly. You've probably read about 5/1 or 3/1 ARMs. For these loans, the initial rate is set for three or five years. It then adjusts every year.

These types of loans are fixed for a certain number of years (3 or 5), then they adjust. Loans like this (ARMs ) are usually best for borrowers who expect to move within three or five years before the loan adjusts.

You might choose an ARM to get a lower initial interest rate and count on moving, refinancing, or absorbing the higher rate after the initial rate goes up. ARMs can be risky when property values decrease and borrowers are unable to sell their homes or refinance their loans.

Have questions about mortgage loans? Call us at (619) 825-9560. It's our job to answer these questions and many others, so we're happy to help!

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