Differences between adjustable and fixed loans

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

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

Borrowers might choose a fixed-rate loan to lock in a low rate. People choose these types of loans when interest rates are low and they wish to lock in the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at a favorable rate. Call Alerus Mortgage at 952 417 8481 to learn more.

There are many different types of Adjustable Rate Mortgages. Generally, the interest for ARMs are based on a federal index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most programs have a "cap" that protects you from sudden increases in monthly payments. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that the payment can go up in one period. Most ARMs also cap your interest rate over the duration of the loan.

ARMs usually start out at a very low rate that may increase over time. You've probably 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 types of loans are fixed for 3 or 5 years, then adjust. Loans like this are best for borrowers who anticipate moving in three or five years. These types of adjustable rate programs most benefit people who plan to move before the loan adjusts.

Most people who choose ARMs do so because they want to get lower introductory rates and do not plan to remain in the house longer than this initial low-rate period. ARMs can be risky in a down market because homeowners could be stuck with rates that go up when they can't sell their home or refinance with a 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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