Differences between adjustable and fixed loans

A fixed-rate loan features the same payment amount for the entire duration of the loan. The property tax and homeowners insurance will go up over time, but for the most part, payment amounts on fixed rate loans don't increase much.

Your first few years of payments on a fixed-rate loan go primarily to pay interest. As you pay on the loan, more of your payment goes toward principal.

Borrowers might choose a fixed-rate loan in order to lock in a low rate. Borrowers select fixed-rate loans because interest rates are low and they want to lock in this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at a good rate. Call Tenby J. Dahman at 3038627760 for details.

There are many kinds of Adjustable Rate Mortgages. ARMs are normally adjusted every six months, based on various indexes.

The majority of Adjustable Rate Mortgages are capped, so they can't increase above a specific 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 a year, even though the index the rate is based on goes up by more than two percent. Sometimes an ARM has a "payment cap" that guarantees that your payment won't go above a certain amount over the course of a given year. Additionally, almost all ARM programs feature a "lifetime cap" — the interest rate can't ever go over the cap amount.

ARMs usually start at a very low rate that usually increases over time. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These types of loans are fixed for a number of years (3 or 5), then they adjust. These loans are best for people who expect to move in three or five years. These types of adjustable rate programs most benefit borrowers who will sell their house or refinance before the initial lock expires.

Most borrowers who choose ARMs do so when they want to take advantage of lower introductory rates and don't plan on staying in the house for any longer than this introductory low-rate period. 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 3038627760. We answer questions about different types of loans every day.