Fixed versus adjustable loans

With a fixed-rate loan, your monthly payment doesn't change for the life of the loan. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance will increase over time, but generally, payment amounts on fixed rate loans vary little.

When you first take out a fixed-rate loan, the majority your payment goes toward interest. As you pay on the loan, more of your payment goes toward principal.

Borrowers can choose a fixed-rate loan to lock in a low rate. Borrowers select these types of loans when interest rates are low and they wish to lock in at the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater stability 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 a favorable rate. Call Carter Financial Solutions at 8668408745 for details.

There are many types of Adjustable Rate Mortgages. Generally, the interest on ARMs are based on a federal index. Some examples of outside indexes are: the 6-month CD rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

The majority of ARMs feature this cap, which means they won't increase above a certain amount in a given period of time. There may be a cap on how much your interest rate can go up in one period. For example: no more than two percent per year, even though the underlying index increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that your monthly payment can increase in a given period. Most ARMs also cap your rate over the life of the loan period.

ARMs usually start out at a very low rate that usually increases as the loan ages. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These types of loans are fixed for a certain number of years (3 or 5), then they adjust after the initial period. These loans are best for people who anticipate moving within three or five years. These types of adjustable rate programs benefit borrowers who will move before the initial lock expires.

Most borrowers who choose ARMs do so because they want to get lower introductory rates and don't plan to remain in the home for any longer than this introductory low-rate period. ARMs can be risky when property values decrease and borrowers can't sell or refinance.

Have questions about mortgage loans? Call us at 8668408745. We answer questions about different types of loans every day.

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Carter Financial Solutions

2291 W. March Ln Suite A100
Stockton, CA 95207