Differences between fixed and adjustable loans

A fixed-rate loan features a fixed payment amount for the entire duration of your loan. The property tax and homeowners insurance will increase over time, but generally, payment amounts on these types of loans change little over the life of the loan.

Your first few years of payments on a fixed-rate loan go primarily toward interest. The amount applied to your principal amount increases up gradually each month.

Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select these types of loans when interest rates are low and they want to lock in the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at a favorable rate. Call The Lending Source at (973) 601-2122 to discuss how we can help.

Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, the interest rates for ARMs are determined by an outside index. A few of these are: the 6-month 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 ARMs are capped, so they can't go up above a specific amount in a given period. Some ARMs can't increase more than two percent per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount your payment can go up in a given period. Plus, almost all adjustable programs have a "lifetime cap" — this cap means that the interest rate won't go over the cap amount.

ARMs usually start out at a very low rate that may increase over time. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are usually best for people who expect to move in three or five years. These types of ARMs benefit people who will move before the initial lock expires.

Most borrowers who choose ARMs do so when they want to get lower introductory rates and do not plan on remaining in the home longer than the introductory low-rate period. ARMs can be risky when property values go down and borrowers can't sell or refinance.

Have questions about mortgage loans? Call us at (973) 601-2122. It's our job to answer these questions and many others, so we're happy to help!

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