Differences between fixed and adjustable rate loans

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A fixed-rate loan features a fixed payment amount over the life of the loan. The property taxes and homeowners insurance will go up over time, but in general, payments on fixed rate loans don't increase much.

Your first few years of payments on a fixed-rate loan are applied mostly toward interest. As you pay , more of your payment is applied to principal.

Borrowers might choose a fixed-rate loan in order to lock in a low rate. People select these types of loans when interest rates are low and they want to lock in at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at the best rate currently available. Call Abacus Mortgage & Loans at 5036903088 to discuss your situation with one of our professionals.

Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. Generally, the interest on ARMs are determined by a federal 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 ARM programs feature a "cap" that protects you from sudden increases in monthly payments. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than a couple percent per year, even if the underlying index increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount the monthly payment can go up in a given period. Plus, almost all ARM programs feature a "lifetime cap" — this cap means that the interest rate won't go over the capped percentage.

ARMs most often have the lowest, most attractive rates at the beginning of the loan. They usually provide the lower interest rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is fixed for three or five years. It then adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust after the initial period. Loans like this are best for borrowers who expect to move within three or five years. These types of adjustable rate loans most benefit borrowers who will sell their house or refinance before the initial lock expires.

You might choose an ARM to take advantage of a lower initial rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. ARMs are risky if property values decrease and borrowers cannot sell their home or refinance.

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