Fixed versus adjustable loans

With a fixed-rate loan, your payment doesn't change for the life of your loan. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, 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.

At the beginning of a a fixed-rate mortgage loan, the majority your payment is applied to interest. This proportion gradually reverses as the loan ages.

You can choose a fixed-rate loan to lock in a low interest rate. Borrowers select fixed-rate loans when interest rates are low and they want to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at a good rate. Call Stepping Stone Mortgage at (541) 683-3300 to discuss your situation with one of our professionals.

There are many kinds of Adjustable Rate Mortgages. Generally, the 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 ARMs feature this cap, so they can't go up above a certain amount in a given period of time. There may be a cap on how much your interest rate can go up in one period. For example: no more than a couple percent a year, even if the index the rate is based on increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount the payment can increase in one period. The majority of ARMs also cap your interest rate over the life of the loan period.

ARMs most often feature the lowest rates toward the start of the loan. They provide that rate from a month to ten years. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are often best for people who anticipate moving within three or five years. These types of adjustable rate loans most benefit people who will move before the loan adjusts.

Most borrowers who choose ARMs choose them because they want to get lower introductory rates and do not plan on staying in the home longer than the introductory low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates when they cannot sell their home or refinance with a lower property value.

Have questions about mortgage loans? Call us at (541) 683-3300. We answer questions about different types of loans every day.

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