Fixed versus adjustable loans

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A fixed-rate loan features a fixed payment amount for the entire duration of your mortgage. The property tax and homeowners insurance will increase over time, but in general, payments on these types of loans vary little.

At the beginning of a a fixed-rate mortgage loan, the majority your payment is applied to interest. This proportion reverses itself as the loan ages.

Borrowers might choose a fixed-rate loan to lock in a low interest rate. People choose these types of loans because interest rates are low and they want to lock in this lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at the best rate currently available. Call Keypoint Mortgage at 201-998-9050 to discuss your situation with one of our professionals.

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

Most ARM programs have a cap that protects you from sudden monthly payment increases. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that guarantees your payment can't increase beyond a certain amount in a given year. Plus, almost all adjustable programs have a "lifetime cap" — your rate will never exceed the cap percentage.

ARMs most often feature their lowest rates at the beginning of the loan. They usually provide that rate from a month to ten years. You've likely heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are often best for borrowers who expect to move within three or five years. These types of adjustable rate loans benefit borrowers who will move before the initial lock expires.

Most borrowers who choose ARMs choose them because they want to take advantage of lower introductory rates and don't plan to stay in the home for any longer than this initial low-rate period. ARMs can be risky in a down market because homeowners could be stuck with increasing rates if they can't sell or refinance with a lower property value.

Have questions about mortgage loans? Call us at 201-998-9050. We answer questions about different types of loans every day.

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