Adjustable versus fixed loans

A fixed-rate loan features a fixed payment amount for the entire duration of your mortgage. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but for the most part, payments on fixed rate loans vary little.

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

Borrowers can choose a fixed-rate loan in order to lock in a low rate. Borrowers choose fixed-rate loans because interest rates are low and they wish to lock in 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 currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at the best rate currently available. Call Alerus Mortgage at 952 417 8481 to learn more.

Adjustable Rate Mortgages — ARMs, come in even more varieties. Generally, interest rates on ARMs are based on a federal index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARMs are capped, so they can't go up above a certain amount in a given period of time. There may be a cap on how much your interest rate can go up in one period. For example: no more than a couple percent a year, even though the underlying index increases by more than two percent. Sometimes an ARM features a "payment cap" which ensures that your payment can't increase beyond a certain amount over the course of a given year. Additionally, the great majority of ARMs feature a "lifetime cap" — this means that the rate can't go over the cap percentage.

ARMs most often have the lowest rates toward the beginning of the loan. They guarantee the lower interest rate for an initial period that varies greatly. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are best for borrowers who expect to move within three or five years. These types of adjustable rate loans most benefit people who plan to sell their house or refinance before the initial lock expires.

Most people who choose ARMs do so because they want to get lower introductory rates and do not plan on remaining in the house for any longer than the initial low-rate period. ARMs can be risky in a down market because homeowners can get stuck with rates that go up when they cannot sell or refinance with a lower property value.

Have questions about mortgage loans? Call us at 952 417 8481. We answer questions about different types of loans every day.

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