Differences between adjustable and fixed rate loans

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A fixed-rate loan features a fixed payment for the entire duration of your loan. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part payments on your fixed-rate loan will be very stable.

Your first few years of payments on a fixed-rate loan are applied primarily toward interest. That gradually reverses itself as the loan ages.

Borrowers can choose a fixed-rate loan to lock in a low rate. Borrowers choose these types of loans because interest rates are low and they want to lock in the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater 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 a good rate. Call Ace One Mortgage LLC at 724-933-9070 to discuss how we can help.

Adjustable Rate Mortgages — ARMs, come in a great number of varieties. Generally, interest for ARMs are determined by an outside index. A few of these are: the 6-month CD rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most programs have a cap that protects borrowers from sudden monthly payment increases. Some ARMs can't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that ensures that your payment can't go above a certain amount in a given year. Plus, almost all adjustable programs feature a "lifetime cap" — your rate won't go over the cap amount.

ARMs usually start out at a very low rate that may increase over time. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is set 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 adjust. These loans are usually best for borrowers who anticipate moving in three or five years. These types of adjustable rate programs most benefit people who will move before the initial lock expires.

Most people who choose ARMs choose them when they want to get lower introductory rates and do not plan on remaining in the home for any longer than the introductory low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up if they cannot sell or refinance with a lower property value.

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