Adjustable versus fixed loans

With a fixed-rate loan, your monthly payment remains the same for the entire duration of the mortgage. The portion of the payment allocated for principal (the actual loan amount) will increase, but the amount you pay in interest will go down accordingly. 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 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.

Borrowers might choose a fixed-rate loan to lock in a low interest rate. People choose these types of loans when interest rates are low and they want to lock in at the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call Alerus Mortgage at 952 417 8481 to discuss your situation with one of our professionals.

Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. ARMs usually adjust twice a year, based on various indexes.

Most ARM programs have a "cap" that protects borrowers from sudden monthly payment increases. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than a couple percent per year, even if the index the rate is based on increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that your monthly payment can increase in a given period. The majority of ARMs also cap your rate over the life of the loan.

ARMs usually start out at a very low rate that may increase over time. You've probably read about 5/1 or 3/1 ARMs. In 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 they adjust. These loans are usually best for borrowers who anticipate moving in three or five years. These types of adjustable rate loans are best for borrowers who will sell their house or refinance before the initial lock expires.

You might choose an ARM to get a lower introductory interest rate and count on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky in a down market because homeowners can get stuck with increasing rates if they can't sell or refinance at the lower property value.

Have questions about mortgage loans? Call us at 952 417 8481. It's our job to answer these questions and many others, so we're happy to help!

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