Adjustable versus fixed loans

With a fixed-rate loan, your payment never changes for the life of the mortgage. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance will increase over time, but generally, payment amounts on these types of loans change little over the life of the loan.

Your first few years of payments on a fixed-rate loan go primarily toward interest. The amount applied to your principal amount increases up gradually every month.

You can choose a fixed-rate loan in order to lock in a low interest rate. People choose these types of loans when interest rates are low and they want to lock in this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at a favorable rate. Call VSI Home Lending at (260) 338-2561 for details.

There are many different types of Adjustable Rate Mortgages. ARMs are normally adjusted twice a year, based on various indexes.

Most programs have a cap that protects you from sudden monthly payment increases. There may be a cap on interest rate variances over the course of a year. For example: no more than two percent per year, even if the index the rate is based on goes up by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount your payment can increase in a given period. Plus, the great majority of ARM programs have a "lifetime cap" — this cap means that your rate can't exceed the cap amount.

ARMs most often have their lowest, most attractive rates toward the start of the loan. They usually provide the lower interest rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for a certain number of years (3 or 5), then they adjust. These loans are usually best for people who anticipate moving within three or five years. These types of adjustable rate loans benefit people 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 home for any longer than this introductory low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates if they cannot sell their home or refinance with a lower property value.

Have questions about mortgage loans? Call us at (260) 338-2561. It's our job to answer these questions and many others, so we're happy to help!

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