Fixed versus adjustable loans

A fixed-rate loan features the same payment over the life of your mortgage. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part payment amounts for your fixed-rate loan will increase very little.

Early in a fixed-rate loan, most of your monthly payment pays interest, and a significantly smaller part toward principal. The amount paid toward your principal amount increases up gradually each month.

Borrowers might choose a fixed-rate loan to lock in a low rate. Borrowers choose 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 provide greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at a favorable rate. Call VSI Home Lending at 2603382561 to discuss your situation with one of our professionals.

There are many different kinds of Adjustable Rate Mortgages. Generally, interest on ARMs are based on an outside index. Some examples of outside indexes are: the 6-month Certificate of Deposit (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 feature a "cap" that protects borrowers from sudden increases in monthly payments. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that ensures that your payment can't increase beyond a fixed amount in a given year. Most ARMs also cap your interest rate over the life of the loan.

ARMs most often have the lowest rates at the start. They usually guarantee the lower rate from a month to ten years. You've probably read about 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are usually best for borrowers who expect to move within three or five years. These types of ARMs benefit people who plan to move before the loan adjusts.

Most people who choose ARMs do so because they want to take advantage of lower introductory rates and do not plan on remaining in the home for any longer than the initial low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates when they can't sell or refinance with a lower property value.

Have questions about mortgage loans? Call us at 2603382561. We answer questions about different types of loans every day.

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