Fixed versus adjustable loans

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A fixed-rate loan features the same payment amount over the life of your mortgage. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but in general, payments on these types of loans vary little.

At the beginning of a a fixed-rate loan, most of the payment goes toward interest. This proportion gradually reverses as the loan ages.

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 wish to lock in this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call Bluff City Mortgage, Inc at (901) 861-8022 for details.

Adjustable Rate Mortgages — ARMs, as we called them above — 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. There may be a cap on interest rate increases over the course of a year. For example: no more than two percent a year, even though the index the rate is based on 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 monthly payment can increase in a given period. Plus, almost all adjustable programs feature a "lifetime cap" — your rate can't ever go over the capped percentage.

ARMs most often have the lowest, most attractive rates at the beginning of the loan. They provide the lower interest rate from a month to ten years. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. It then adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust. Loans like this are often best for people who anticipate moving in three or five years. These types of adjustable rate programs are best for people who will move before the loan adjusts.

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 longer than the introductory low-rate period. ARMs are risky when property values decrease and borrowers can't sell their home or refinance their loan.

Have questions about mortgage loans? Call us at (901) 861-8022. It's our job to answer these questions and many others, so we're happy to help!