Adjustable versus fixed loans

A fixed-rate loan features a fixed payment 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 payments on your fixed-rate loan will increase very little.

Your first few years of payments on a fixed-rate loan go mostly to pay interest. This proportion gradually reverses itself as the loan ages.

You can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose fixed-rate loans because interest rates are low and they wish to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at a favorable rate. Call Avalon Mortgage Services, Inc. at (708) 403-5181 to learn more.

Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs usually adjust every six months, based on various indexes.

Most Adjustable Rate Mortgages feature this cap, so they won't go up over a specific amount in a given period of time. Some ARMs can't increase more than 2% per year, regardless of the underlying interest rate. 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 one period. In addition, the great majority of ARMs feature a "lifetime cap" — the rate won't exceed the cap amount.

ARMs most often feature their lowest rates toward the start. They provide the lower interest rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are best for borrowers who expect to move within three or five years. These types of ARMs benefit people who plan to sell their house or refinance before the loan adjusts.

You might choose an Adjustable Rate Mortgage to get a lower introductory interest rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs are risky when property values go down and borrowers can't sell or refinance.

Have questions about mortgage loans? Call us at (708) 403-5181. It's our job to answer these questions and many others, so we're happy to help!

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