Fixed versus adjustable loans

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

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

Borrowers can choose a fixed-rate loan in order to lock in a low rate. People choose these types of loans because interest rates are low and they want to lock in at the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at a favorable rate. Call TLC Financial Services at 562-818-3502 to discuss how we can help.

Adjustable Rate Mortgages — ARMs, come in a great number of varieties. ARMs usually adjust twice a year, based on various indexes.

Most ARMs feature this cap, which means they can't go up above a specified amount in a given period of time. Your ARM may feature 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 though the index the rate is based on increases by more than two percent. Sometimes an ARM has a "payment cap" that guarantees your payment will not go above a fixed amount over the course of a given year. In addition, the great majority of adjustable programs feature a "lifetime cap" — the interest rate can never go over the cap amount.

ARMs most often feature their lowest rates at the start. They provide the lower rate for an initial period that varies greatly. You've probably read about 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 loans are fixed for a certain number of years (3 or 5), then they adjust. These loans are usually best for people who expect to move in three or five years. These types of ARMs benefit people who plan to move before the loan adjusts.

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

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