Fixed versus adjustable loans

A fixed-rate loan features the same payment amount for the entire duration of your loan. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. For the most part monthly payments on a fixed-rate mortgage will be very stable.

Your first few years of payments on a fixed-rate loan go primarily to pay interest. The amount paid toward your principal amount increases up gradually each month.

You can choose a fixed-rate loan in order to lock in a low rate. Borrowers choose fixed-rate loans because interest rates are low and they wish to lock in this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at the best rate currently available. Call Channel Mortgage LLC at (718) 639-9500 to discuss how we can help.

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 ARM programs have a "cap" that protects you from sudden increases in monthly payments. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount your monthly payment can increase in a given period. Plus, almost all adjustable programs have a "lifetime cap" — the rate can't exceed the cap amount.

ARMs usually start at a very low rate that usually increases over time. You've probably read about 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 number of years (3 or 5), then they adjust after the initial period. Loans like this are usually best for borrowers who anticipate moving in three or five years. These types of ARMs are best for borrowers who plan to move before the initial lock expires.

You might choose an ARM to take advantage of a lower introductory rate and count on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates if they cannot sell their home or refinance at the lower property value.

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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