Differences between adjustable and fixed rate loans

A fixed-rate loan features the same payment over the life of the mortgage. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part payment amounts for a 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 gradually reverses itself as the loan ages.

You can choose a fixed-rate loan to lock in a low interest rate. Borrowers select these types of loans when interest rates are low and they wish to lock in at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call Carter Financial Solutions at 8668408745 to discuss your situation with one of our professionals.

There are many different types of Adjustable Rate Mortgages. Generally, the interest rates on ARMs are determined by an outside index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

The majority of ARMs feature this cap, so they won't increase over a certain amount in a given period of time. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that your payment can increase in a given period. Additionally, the great majority of adjustable programs feature a "lifetime cap" — this cap means that the rate can never go over the cap percentage.

ARMs most often have their lowest, most attractive rates at the start of the loan. They provide the lower interest rate from a month to ten years. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then they adjust. Loans like this are usually best for borrowers who expect to move in three or five years. These types of adjustable rate programs benefit people who plan to move before the initial lock expires.

You might choose an ARM to take advantage of a lower initial rate and count on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs can be risky in a down market because homeowners could be stuck with increasing rates if they can't sell or refinance at the lower property value.

Have questions about mortgage loans? Call us at 8668408745. It's our job to answer these questions and many others, so we're happy to help!

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Carter Financial Solutions

2291 W. March Ln Suite A100
Stockton, CA 95207