Differences between adjustable and fixed rate loans

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A fixed-rate loan features the same payment amount over the life of the mortgage. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but in general, payment amounts on fixed rate loans don't increase much.

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

Borrowers might choose a fixed-rate loan in order to lock in a low rate. People select fixed-rate loans because interest rates are low and they wish to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at a good rate. Call Diversified Mortgage Group at (208) 853-7878 to discuss how we can help.

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 Certificate of Deposit (CD) rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARMs feature this cap, so they won't go up above a certain amount in a given period. Some ARMs won't increase more than 2% 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 that the payment can increase in one period. In addition, the great majority of adjustable programs have a "lifetime cap" — your rate can't exceed the cap percentage.

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". For these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are best for borrowers who expect to move in three or five years. These types of ARMs most benefit people who will sell their house or refinance before the loan adjusts.

Most borrowers who choose ARMs do so when they want to get lower introductory rates and do not plan to remain in the home for any longer than the introductory low-rate period. ARMs are risky when property values decrease and borrowers are unable to sell or refinance their loan.

Have questions about mortgage loans? Call us at (208) 853-7878. We answer questions about different types of loans every day.

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