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Adjustable versus fixed rate loans

A fixed-rate loan features a fixed payment amount for the entire duration of the loan. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally payment amounts on your fixed-rate mortgage will increase very little.

At the beginning of a a fixed-rate loan, the majority the payment is applied to interest. As you pay , more of your payment goes toward principal.

You might choose a fixed-rate loan to lock in a low rate. Borrowers select these types of loans because 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 greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at a favorable rate. Call AccessOne Mortgage at 919-787-6080 to discuss your situation with one of our professionals.

Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. Generally, interest rates for ARMs are based on an outside index. A few of these 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 ARM programs have a cap that protects you from sudden increases in monthly payments. There may be a cap on how much your interest rate can increase in one period. For example: no more than two percent per year, even though the index the rate is based on goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that your monthly payment can go up in a given period. In addition, the great majority of ARMs have a "lifetime cap" — your interest rate can't ever exceed the cap amount.

ARMs most often have their lowest, most attractive rates toward the start of the loan. They guarantee that rate from a month to ten years. 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 3 or 5 years, then they adjust. These loans are usually best for borrowers who anticipate moving in three or five years. These types of ARMs benefit borrowers who will sell their house or refinance before the initial lock expires.

You might choose an Adjustable Rate Mortgage to get a very low introductory interest rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up if they cannot sell their home or refinance with a lower property value.

Have questions about mortgage loans? Call us at 919-787-6080. It's our job to answer these questions and many others, so we're happy to help!