Adjustable versus fixed loans

A fixed-rate loan features the same payment over the life of your mortgage. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally payment amounts for a fixed-rate mortgage will be very stable.

Your first few years of payments on a fixed-rate loan go mostly toward interest. This proportion reverses itself as the loan ages.

Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose these types of loans when interest rates are low and they wish to lock in at this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at the best rate currently available. Call Cottingham Mortgage Inc. at (800) 288-9693 for details.

There are many different kinds of Adjustable Rate Mortgages. ARMs are generally adjusted every six months, based on various indexes.

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 features a "payment cap" which ensures that your payment will not increase beyond a certain amount over the course of a given year. Most ARMs also cap your interest rate over the duration of the loan.

ARMs most often have their lowest rates at the start of the loan. They usually provide that interest rate for an initial period that varies greatly. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory 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 they adjust. Loans like this are often best for borrowers who anticipate moving within three or five years. These types of ARMs most benefit people who will sell their house or refinance before the loan adjusts.

You might choose an ARM to take advantage of a very low initial interest rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky if property values go down and borrowers can't sell or refinance.

Have questions about mortgage loans? Call us at (800) 288-9693. We answer questions about different types of loans every day.

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