Fixed versus adjustable loans

A fixed-rate loan features the same payment amount over the life of the loan. The property taxes and homeowners insurance will go up over time, but generally, payment amounts on fixed rate loans change little over the life of the loan.

Your first few years of payments on a fixed-rate loan go mostly to pay interest. The amount paid toward principal goes up slowly each month.

Borrowers can choose a fixed-rate loan to lock in a low rate. Borrowers select fixed-rate loans because interest rates are low and they want to lock in this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at the best rate currently available. Call Trustin Mortgage Corporation at (302) 765-8089 for details.

Adjustable Rate Mortgages — ARMs, come in many varieties. ARMs are normally adjusted twice a year, based on various indexes.

Most ARMs feature this cap, which means they won't go up over a specific amount in a given period. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount that the monthly payment can go up in a given period. Plus, almost all ARMs feature a "lifetime cap" — your rate can't ever go over the cap amount.

ARMs usually start at a very low rate that may increase as the loan ages. You've likely read about 5/1 or 3/1 ARMs. In these loans, the initial rate is set for three or five years. It then adjusts every year. These types of loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are usually best for people who anticipate moving in three or five years. These types of adjustable rate programs are best for people who plan to move before the initial lock expires.

Most people who choose ARMs choose them when they want to get lower introductory rates and do not plan to stay in the house for any longer than this introductory low-rate period. ARMs are risky when property values decrease and borrowers are unable to sell their home or refinance their loan.

Have questions about mortgage loans? Call us at (302) 765-8089. It's our job to answer these questions and many others, so we're happy to help!

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