Adjustable versus fixed loans

With a fixed-rate loan, your monthly payment doesn't change for the life of the loan. The amount of the payment that goes for principal (the actual loan amount) will increase, however, your interest payment will decrease accordingly. The property tax and homeowners insurance will go up over time, but for the most part, payments on fixed rate loans change little over the life of the loan.

Your first few years of payments on a fixed-rate loan go mostly toward interest. This proportion reverses as the loan ages.

You might choose a fixed-rate loan to lock in a low rate. Borrowers choose these types of loans when interest rates are low and they wish to lock in this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call Tenby J. Dahman at 3038627760 to discuss how we can help.

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

Most programs feature a "cap" that protects you from sudden increases in monthly payments. There may be a cap on interest rate variances over the course of a year. For example: no more than two percent a year, even if the underlying index increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount that your monthly payment can go up in a given period. In addition, the great majority of ARMs have a "lifetime cap" — your interest rate can never go over the capped amount.

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. For these loans, the initial 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 ARMs most benefit people who plan to sell their house or refinance before the loan adjusts.

You might choose an Adjustable Rate Mortgage 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 if property values go down and borrowers can't sell or refinance.

Have questions about mortgage loans? Call us at 3038627760. We answer questions about different types of loans every day.