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Differences between adjustable and fixed rate loans

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A fixed-rate loan features a fixed payment amount over the life of the mortgage. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part monthly payments for a fixed-rate loan will increase very little.

Your first few years of payments on a fixed-rate loan are applied mostly to pay interest. The amount paid toward principal increases up slowly every month.

You might choose a fixed-rate loan in order to lock in a low rate. Borrowers select these types of loans because interest rates are low and they want to lock in at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at a favorable rate. Call Johnson Mortgage Company LLC at 757-873-1287 to learn more.

There are many different types of Adjustable Rate Mortgages. Generally, the interest on ARMs are based on a federal index. Some examples of outside indexes are: the 6-month 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 feature a "cap" that protects borrowers from sudden increases in monthly payments. There may be a cap on how much your interest rate can go up in one period. For example: no more than two percent per year, even though the underlying index increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount that the payment can go up in one period. The majority of ARMs also cap your rate over the duration of the loan period.

ARMs usually start out at a very low rate that usually increases over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then adjust. Loans like this are often best for borrowers who anticipate moving in three or five years. These types of adjustable rate programs are best for people who plan to sell their house or refinance before the loan adjusts.

Most people who choose ARMs do so when they want to get lower introductory rates and do not plan to remain in the home for any longer than this initial low-rate period. ARMs are risky if property values decrease and borrowers cannot sell or refinance.

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