Differences between adjustable and fixed loans

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A fixed-rate loan features a fixed payment amount for the entire duration of your loan. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but in general, payments on fixed rate loans vary little.

At the beginning of a a fixed-rate mortgage loan, most of your payment goes toward interest. The amount paid toward principal increases up gradually every month.

You can choose a fixed-rate loan to lock in a low interest rate. People select 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 have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at a favorable rate. Call Goodrich Mortgage Group at 208-941-3337 for details.

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

Most ARM programs feature a cap that protects borrowers from sudden monthly payment increases. Some ARMs can'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 directly, caps the amount that the monthly payment can increase in a given period. Almost all ARMs also cap your rate over the duration of the loan period.

ARMs most often feature the lowest, most attractive rates at the start. They usually guarantee that interest rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". In 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 a certain number of years (3 or 5), then they adjust. Loans like this are usually best for borrowers who expect to move in three or five years. These types of adjustable rate programs most benefit borrowers who plan to move before the loan adjusts.

Most people who choose ARMs do so because they want to get lower introductory rates and don't plan to remain in the house for any longer than the initial low-rate period. ARMs are risky if property values decrease and borrowers can't sell or refinance their loan.

Have questions about mortgage loans? Call us at 208-941-3337. We answer questions about different types of loans every day.


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