Adjustable versus fixed rate loans

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With a fixed-rate loan, your monthly payment doesn't change for the life of the loan. The amount allocated for principal (the actual loan amount) will increase, but the amount you pay in interest will go down accordingly. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally payments on a fixed-rate loan will increase very little.

Early in a fixed-rate loan, a large percentage of your payment pays interest, and a much smaller percentage toward principal. This proportion reverses itself as the loan ages.

Borrowers can 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. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at the best rate currently available. Call Sunrise Mortgage Group at - for details.

There are many different kinds of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.

Most programs feature a cap that protects you from sudden monthly payment increases. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than two percent a year, even if the index the rate is based on goes up by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that the monthly payment can increase in a given period. The majority of ARMs also cap your interest rate over the duration of the loan period.

ARMs usually start out at a very low rate that usually increases as the loan ages. You've likely read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. It then adjusts every year. These types of loans are fixed for a number of years (3 or 5), then they adjust. These loans are usually best for people who expect to move within three or five years. These types of adjustable rate loans are best for people who plan to sell their house or refinance before the initial lock expires.

You might choose an ARM to get a lower introductory interest rate and plan on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs can be risky in a down market because homeowners can get stuck with rates that go up if they can't sell their home or refinance with a lower property value.

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