Adjustable versus fixed rate loans

A fixed-rate loan features a fixed payment for the entire duration of your mortgage. The property taxes and homeowners insurance will go up over time, but for the most part, payment amounts on fixed rate loans change little over the life of the loan.

During the early amortization period of a fixed-rate loan, most of your monthly payment goes toward interest, and a much smaller part goes to principal. As you pay , more of your payment goes toward principal.

Borrowers might 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 want to lock in at the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at a favorable rate. Call VSI Home Lending at (260) 338-2561 to learn more.

Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, the interest for ARMs are based on a federal index. A few of these are: the 6-month CD rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARM 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 go up in one period. For example: no more than two percent per year, even if the underlying index increases by more than two percent. Sometimes an ARM features a "payment cap" that guarantees your payment will not go above a fixed amount over the course of a given year. Additionally, almost all ARM programs feature a "lifetime cap" — your rate can't ever exceed the capped percentage.

ARMs usually start at a very low rate that may increase as the loan ages. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is set for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then they adjust. These loans are often best for people who expect to move within three or five years. These types of adjustable rate loans benefit borrowers who will move before the initial lock expires.

Most people who choose ARMs choose them because they want to get lower introductory rates and don't plan on remaining in the home longer than this introductory low-rate period. ARMs can be risky in a down market because homeowners can get stuck with rates that go up when they can't sell their home or refinance at the 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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