Differences between fixed and adjustable loans

A fixed-rate loan features the same payment amount over the life of your mortgage. The property tax and homeowners insurance will increase over time, but generally, payments on these types of loans vary little.

During the early amortization period of a fixed-rate loan, a large percentage of your payment pays interest, and a significantly smaller part goes to principal. The amount applied to your principal amount goes up gradually each month.

Borrowers might choose a fixed-rate loan in order to lock in a low rate. People choose fixed-rate loans because 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 provide more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at a good rate. Call America's Home Loans at 701.222.0100 to learn more.

There are many types of Adjustable Rate Mortgages. Generally, the interest rates on ARMs are determined by an outside index. Some examples of outside indexes are: the 6-month CD rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most programs feature a cap that protects you from sudden increases in monthly payments. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than two percent a year, even if the underlying index goes up by more than two percent. 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 adjustable programs feature a "lifetime cap" — your interest rate can never exceed the capped amount.

ARMs usually start at a very low rate that may increase as the loan ages. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is set for three or five years. It then adjusts every year. These loans are fixed for a certain number of years (3 or 5), then they adjust after the initial period. These loans are often best for people who anticipate moving in three or five years. These types of adjustable rate loans are best for people who plan to sell their house or refinance before the initial lock expires.

Most borrowers who choose ARMs do so because they want to get lower introductory rates and do not plan to stay in the home for any longer than this introductory low-rate period. ARMs can be risky in a down market because homeowners could be stuck with increasing rates when they can't sell or refinance with a 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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