Differences between adjustable and fixed loans

A fixed-rate loan features a fixed payment over the life of the mortgage. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part payment amounts for a fixed-rate loan will increase very little.

At the beginning of a a fixed-rate loan, the majority your payment is applied to interest. As you pay on the loan, more of your payment is applied to principal.

Borrowers might choose a fixed-rate loan to lock in a low rate. Borrowers choose fixed-rate loans because interest rates are low and they want to lock in at the lower 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 have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at the best rate currently available. Call Stepping Stone Mortgage at 5416833300 to discuss how we can help.

Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. ARMs are normally adjusted every six months, based on various indexes.

Most ARMs are capped, which means they can't increase over a certain amount in a given period of time. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than two percent per year, even though the underlying index increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount the monthly payment can increase in one period. Plus, the great majority of ARMs have a "lifetime cap" — the rate can't ever go over the cap percentage.

ARMs usually start out at a very low rate that may increase as the loan ages. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is set for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then they adjust. Loans like this are usually best for people who expect to move within three or five years. These types of adjustable rate programs benefit people who will sell their house or refinance before the loan adjusts.

You might choose an Adjustable Rate Mortgage to get a lower introductory interest rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs are risky if property values decrease and borrowers cannot sell their home or refinance.

Have questions about mortgage loans? Call us at 5416833300. We answer questions about different types of loans every day.