Adjustable versus fixed rate loans

A fixed-rate loan features the same payment for the entire duration of your loan. The property taxes and homeowners insurance will increase over time, but in general, payments on fixed rate loans change little over the life of the loan.

Your first few years of payments on a fixed-rate loan go mostly to pay interest. That reverses itself as the loan ages.

You might choose a fixed-rate loan to lock in a low rate. Borrowers select these types of loans when interest rates are low and they want to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at a favorable rate. Call America's Home Loans at 701.222.0100 to discuss your situation with one of our professionals.

There are many types of Adjustable Rate Mortgages. Generally, the interest on 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 programs have a cap that protects you from sudden increases in monthly payments. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount your monthly payment can go up in a given period. In addition, almost all ARM programs feature a "lifetime cap" — this means that your interest rate can't ever exceed the capped amount.

ARMs usually start out 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 initial 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. Loans like this are best for borrowers who anticipate moving within three or five years. These types of adjustable rate loans most benefit borrowers who plan to sell their house or refinance before the loan adjusts.

Most people who choose ARMs do so when they want to take advantage of lower introductory rates and do not plan on remaining in the house longer than this initial low-rate period. ARMs can be risky in a down market because homeowners can get stuck with rates that go up if they can't sell or refinance at the lower property value.

Have questions about mortgage loans? Call us at 701.222.0100. It's our job to answer these questions and many others, so we're happy to help!

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