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Differences between adjustable and fixed loans

A fixed-rate loan features a fixed payment over the life of your loan. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part monthly payments for your fixed-rate mortgage will be very stable.

When you first take out a fixed-rate mortgage loan, most of your payment goes toward interest. The amount applied to principal goes up gradually each month.

Borrowers can choose a fixed-rate loan to lock in a low interest rate. People 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 with a fixed-rate loan can offer greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at a good rate. Call Greystone Loans, Inc. at (909) 467-1090 to discuss how we can help.

Adjustable Rate Mortgages — ARMs, come in even more varieties. Generally, interest on ARMs are based on a federal index. Some examples of outside indexes are: the 6-month Certificate of Deposit (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 ARM programs have a cap that protects borrowers from sudden monthly payment increases. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than two percent a year, even if the underlying index increases by more than two percent. Sometimes an ARM has a "payment cap" which guarantees your payment will not go above a fixed amount in a given year. In addition, the great majority of ARMs feature a "lifetime cap" — the interest rate won't exceed the capped amount.

ARMs most often feature the lowest, most attractive rates at the start of the loan. They provide that interest rate for an initial period that varies greatly. You've likely read about 5/1 or 3/1 ARMs. In these loans, the initial rate is set for three or five years. After this period it adjusts every year. These loans are fixed for a certain number of years (3 or 5), then they adjust. Loans like this are often best for borrowers who anticipate moving in three or five years. These types of ARMs benefit borrowers who plan to move before the initial lock expires.

Most people who choose ARMs do so when they want to take advantage of lower introductory rates and don't plan to stay in the house longer than this initial 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 (909) 467-1090. We answer questions about different types of loans every day.

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