Fixed versus adjustable rate loans

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A fixed-rate loan features the same payment for the entire duration of the mortgage. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally monthly payments for your fixed-rate mortgage will be very stable.

Early in a fixed-rate loan, most of your payment pays interest, and a much smaller percentage toward principal. That gradually reverses 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 want to lock in at the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call Crescent Mortgage at 2817646553 to learn more.

There are many types of Adjustable Rate Mortgages. Generally, interest for ARMs are determined by a federal index. A few of these are: the 6-month CD rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

The majority of ARMs feature this cap, so they won't increase over a specific amount in a given period of time. There may be a cap on interest rate variances over the course of a year. For example: no more than two percent a year, even if the underlying index increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount that the payment can go up in one period. Most ARMs also cap your rate over the life of the loan period.

ARMs usually start out 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 introductory rate is fixed for three or five years. It then adjusts every year. These types of loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are often best for borrowers who expect to move within three or five years. These types of ARMs are best for people who plan to sell their house or refinance before the loan adjusts.

Most people who choose ARMs choose them because they want to take advantage of lower introductory rates and don't plan to remain in the house longer than the initial low-rate period. ARMs can be risky when property values go down and borrowers can't sell their home or refinance their loan.

Have questions about mortgage loans? Call us at 2817646553. It's our job to answer these questions and many others, so we're happy to help!