Fixed versus adjustable rate loans

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With a fixed-rate loan, your monthly payment stays the same for the entire duration of the loan. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but for the most part, payment amounts on these types of loans change little over the life of the loan.

Early in a fixed-rate loan, a large percentage of your payment pays interest, and a significantly smaller part goes to principal. That gradually reverses as the loan ages.

You can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose fixed-rate loans when interest rates are low and they wish to lock in at this lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at a good rate. Call Pinnacle Lending Group, Inc. at (702) 730-2085 to learn more.

Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. Generally, the interest 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 ARM programs feature a "cap" that protects borrowers from sudden increases in monthly payments. Your ARM may feature a cap on interest rate variances over the course of a year. 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 ensures that your payment will not go above a fixed amount over the course of a given year. Additionally, the great majority of adjustable programs have a "lifetime cap" — your interest rate can't 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. In these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These kinds of loans are fixed for a certain number of years (3 or 5), then they adjust after the initial period. These loans are often best for borrowers who anticipate moving within three or five years. These types of ARMs most benefit borrowers who will move before the initial lock expires.

Most people who choose ARMs choose them when they want to take advantage of lower introductory rates and do not plan on staying in the home for any longer than the introductory low-rate period. ARMs are risky if property values go down and borrowers cannot sell their home or refinance their loan.

Have questions about mortgage loans? Call us at (702) 730-2085. It's our job to answer these questions and many others, so we're happy to help!