Differences between fixed and adjustable loans

A fixed-rate loan features a fixed payment amount for the entire duration of your loan. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but in general, payment amounts on these types of loans don't increase much.

Early in a fixed-rate loan, most of your monthly payment goes toward interest, and a much smaller percentage toward principal. That reverses itself as the loan ages.

Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select these types of loans when interest rates are low and they want to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at a favorable rate. Call Alerus Mortgage at 952 417 8481 for details.

Adjustable Rate Mortgages — ARMs, come in even more varieties. Generally, the interest rates for ARMs are based on an outside index. A few of these are: the 6-month Certificate of Deposit (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 feature a cap that protects borrowers from sudden monthly payment increases. Some ARMs won't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which guarantees your payment will not increase beyond a fixed amount in a given year. The majority of ARMs also cap your rate over the life of the loan period.

ARMs most often have the lowest, most attractive rates at the start. 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". For these loans, the introductory rate is set for three or five years. It then adjusts every year. These kinds of loans are fixed for a certain number of years (3 or 5), then adjust after the initial period. These loans are best for borrowers who expect to move within three or five years. These types of ARMs benefit people who plan to sell their house or refinance before the initial lock expires.

You might choose an ARM to get a very low initial rate and plan on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs can be risky when property values decrease and borrowers are unable to sell their home or refinance.

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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