Fixed versus adjustable rate loans

A fixed-rate loan features the same payment amount over the life of the loan. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally payments for a fixed-rate mortgage will be very stable.

Early in a fixed-rate loan, a large percentage of your payment pays interest, and a much smaller percentage toward principal. This proportion reverses itself as the loan ages.

You can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose these types of loans when interest rates are low and they wish to lock in this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at a good rate. Call Carter Financial Solutions at 8668408745 to discuss your situation with one of our professionals.

Adjustable Rate Mortgages — ARMs, come in a great number of varieties. Generally, interest rates for ARMs are based on a federal 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), or others.

Most programs feature a cap that protects you from sudden increases in monthly payments. There may be a cap on how much your interest rate can increase in one period. For example: no more than two percent per year, even though the index the rate is based on increases by more than two percent. Sometimes an ARM has a "payment cap" which ensures your payment will not increase beyond a fixed amount in a given year. Additionally, almost all ARM programs have a "lifetime cap" — the rate can never go over the capped amount.

ARMs usually start at a very low rate that may increase as the loan ages. You've likely heard of 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 types of loans are fixed for 3 or 5 years, then they adjust. Loans like this are often best for people who expect to move within three or five years. These types of ARMs most benefit borrowers who will move 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 on remaining in the house longer than this introductory low-rate period. ARMs are risky when property values decrease and borrowers cannot sell or refinance.

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