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Fixed versus adjustable loans

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 for the most part, payments on fixed rate loans don't increase much.

During the early amortization period of a fixed-rate loan, a large percentage of your payment pays interest, and a significantly smaller percentage goes to principal. This proportion gradually reverses itself as the loan ages.

You might choose a fixed-rate loan to lock in a low rate. Borrowers choose these types of loans when interest rates are low and they want to lock in this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call Greystone Loans, Inc. at (909) 467-1090 for details.

There are many different types of Adjustable Rate Mortgages. ARMs are generally adjusted every six months, based on various indexes.

Most Adjustable Rate Mortgages are capped, so they won't increase above a certain amount in a given period. There may be a cap on how much your interest rate can go up in one period. For example: no more than two percent per year, even if the underlying index increases by more than two percent. Sometimes an ARM features a "payment cap" that ensures that your payment will not go above a fixed amount over the course of a given year. Additionally, the great majority of ARMs feature a "lifetime cap" — this cap means that the interest rate can never go over the capped amount.

ARMs most often have the lowest rates toward the beginning. They guarantee that interest rate for an initial period that varies greatly. You've likely read about 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then they adjust. Loans like this are best for borrowers who anticipate moving within three or five years. These types of adjustable rate loans are best for borrowers who plan to sell their house or refinance before the loan adjusts.

Most people who choose ARMs do so when they want to take advantage of lower introductory rates and do not plan to remain in the house longer than this initial low-rate period. ARMs are risky when property values decrease and borrowers can't sell their home or refinance.

Have questions about mortgage loans? Call us at (909) 467-1090. It's our job to answer these questions and many others, so we're happy to help!

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