Differences between fixed and adjustable loans

A fixed-rate loan features the same payment over the life of your loan. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally payments for a fixed-rate mortgage will increase very little.

Early in a fixed-rate loan, most of your monthly payment goes toward interest, and a significantly smaller part goes to principal. This proportion reverses as the loan ages.

You might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select these types of loans when interest rates are low and they want to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call Carter Financial Solutions at 866-840-8745 x2 to learn more.

Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. Generally, interest on ARMs are based on an outside index. Some examples of outside indexes 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 programs have a "cap" that protects borrowers 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 per year, even though the index the rate is based on goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount that the payment can go up in one period. In addition, almost all ARMs have a "lifetime cap" — this means that the rate will never exceed the capped amount.

ARMs usually start at a very low rate that usually increases as the loan ages. You've likely read about 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are often best for people who anticipate moving in three or five years. These types of ARMs are best for people who will sell their house or refinance before the loan adjusts.

You might choose an ARM to get a very low initial rate and count on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky if property values decrease and borrowers cannot sell their home or refinance.

Have questions about mortgage loans? Call us at 866-840-8745 x2. It's our job to answer these questions and many others, so we're happy to help!

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Carter Financial Solutions

1810 Pacific Ave
Stockton, CA 95204