Adjustable versus fixed rate loans

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

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

Borrowers might choose a fixed-rate loan to lock in a low interest rate. People choose fixed-rate loans when interest rates are low and they want to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more stability in monthly payments. 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 America's Home Loans at 701.222.0100 for details.

Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. ARMs are normally adjusted twice a year, based on various indexes.

Most programs have a cap that protects borrowers from sudden monthly payment increases. There may be a cap on how much your interest rate can go up in one period. For example: no more than two percent per year, even if the underlying index increases by more than two percent. Sometimes an ARM has a "payment cap" that guarantees that your payment can't increase beyond a certain amount in a given year. Plus, almost all ARMs have a "lifetime cap" — this means that your rate won't exceed the capped amount.

ARMs usually start out at a very low rate that usually increases as the loan ages. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then they adjust. Loans like this are usually best for people who expect to move in three or five years. These types of adjustable rate programs most benefit borrowers who will move before the loan adjusts.

Most borrowers who choose ARMs choose them because they want to get lower introductory rates and don't plan on staying in the house longer than the introductory low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates if they can't sell or refinance with a lower property value.

Have questions about mortgage loans? Call us at 701.222.0100. We answer questions about different types of loans every day.

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