Adjustable versus fixed loans

With a fixed-rate loan, your monthly payment never changes for the life of your loan. The portion of the payment that goes for your principal (the actual loan amount) goes up, however, the amount you pay in interest will go down in the same amount. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but generally, payments on these types of loans change little over the life of the loan.

Your first few years of payments on a fixed-rate loan go mostly toward interest. The amount applied to principal goes up slowly every month.

Borrowers might choose a fixed-rate loan to lock in a low rate. People select these types of loans because 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 greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at a good rate. Call Channel Mortgage LLC at (718) 639-9500 for details.

Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. ARMs are generally adjusted every six months, based on various indexes.

Most ARMs are capped, so they can't go up above a certain amount in a given period of time. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that guarantees your payment will not increase beyond a certain amount in a given year. Almost all ARMs also cap your rate over the duration of the loan.

ARMs usually start at a very low rate that usually increases over time. You've probably heard of 5/1 or 3/1 ARMs. For 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 adjust. These loans are often best for borrowers who anticipate moving within three or five years. These types of ARMs most benefit borrowers who plan to sell their house or refinance before the initial lock expires.

Most borrowers who choose ARMs choose them because they want to take advantage of lower introductory rates and do not plan on staying in the house longer than the introductory low-rate period. ARMs can be risky when property values go down and borrowers can't sell their home or refinance.

Have questions about mortgage loans? Call us at (718) 639-9500. It's our job to answer these questions and many others, so we're happy to help!

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