Differences between adjustable and fixed loans

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A fixed-rate loan features a fixed payment amount 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. For the most part monthly payments on a fixed-rate loan will be very stable.

Early in a fixed-rate loan, a large percentage of your payment goes toward interest, and a much smaller part goes to principal. The amount paid toward your principal amount increases up slowly every month.

Borrowers can choose a fixed-rate loan to lock in a low rate. Borrowers choose fixed-rate loans because interest rates are low and they wish to lock in the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at a favorable rate. Call FKEJ-4 Inc., dba Your Equity Services at 425-392-2295 for details.

There are many types of Adjustable Rate Mortgages. Generally, interest on ARMs are determined by a federal index. A few of these 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 programs have a "cap" that protects you from sudden increases in monthly payments. Some ARMs can't adjust more than two percent 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 in a given year. The majority of ARMs also cap your interest rate over the duration of the loan.

ARMs most often have the lowest, most attractive rates at the beginning of the loan. They usually provide the lower interest rate from a month to ten years. You may have heard about "3/1 ARMs" or "5/1 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. Loans like this are often best for people who expect to move in three or five years. These types of ARMs benefit borrowers who plan to sell their house or refinance before the initial lock expires.

Most people who choose ARMs do so because they want to take advantage of lower introductory rates and do not plan to stay in the house longer than this initial low-rate period. ARMs can be risky when property values go down and borrowers cannot sell their home or refinance their loan.

Have questions about mortgage loans? Call us at 425-392-2295. It's our job to answer these questions and many others, so we're happy to help!

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