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Differences between fixed and adjustable loans

A fixed-rate loan features the same payment for the entire duration of the mortgage. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but in general, payments on fixed rate loans don't increase much.

When you first take out a fixed-rate loan, most of your payment is applied to interest. The amount applied to principal goes up gradually every month.

You might choose a fixed-rate loan to lock in a low rate. Borrowers select fixed-rate loans because interest rates are low and they want to lock in the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at a good rate. Call AccessOne Mortgage at 919-787-6080 for details.

Adjustable Rate Mortgages — ARMs, come in a great number of varieties. Generally, interest rates for ARMs are determined by 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 ARMs feature this cap, so they can't increase over a specific amount in a given period of time. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which ensures that your payment won't increase beyond a fixed amount over the course of a given year. Additionally, almost all adjustable programs have a "lifetime cap" — your interest rate can't exceed the cap amount.

ARMs usually start at a very low rate that may increase over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust. Loans like this are often best for borrowers who expect to move in three or five years. These types of adjustable rate programs are best for borrowers who will sell their house or refinance before the loan adjusts.

Most borrowers who choose ARMs do so because they want to take advantage of lower introductory rates and don't plan to stay in the house longer than the initial low-rate period. ARMs can be risky in a down market because homeowners could be stuck with rates that go up if they can't sell their home or refinance at the 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!