Differences between adjustable and fixed rate loans

A fixed-rate loan features the same payment for the entire duration of your loan. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally payment amounts on your fixed-rate loan will be very stable.

When you first take out a fixed-rate mortgage loan, most of the payment is applied to interest. The amount paid toward principal increases up gradually every month.

Borrowers can choose a fixed-rate loan to lock in a low interest rate. Borrowers select these types of loans when interest rates are low and they want to lock in at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more consistency 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 MidTowne Mortgage at (478) 746-2063 to learn more.

There are many different kinds of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.

The majority of ARMs are capped, which means they won't go up above a certain amount in a given period. There may be a cap on interest rate increases over the course of a year. For example: no more than a couple percent a year, even if the index the rate is based on increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount the monthly payment can go up in a given period. Additionally, almost all adjustable programs feature a "lifetime cap" — your rate won't exceed the capped amount.

ARMs usually start at a very low rate that may increase over time. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then they adjust. These loans are usually best for borrowers who expect to move in three or five years. These types of adjustable rate programs benefit people who will move before the loan adjusts.

Most people who choose ARMs do so because they want to get lower introductory rates and don't plan on remaining in the house longer than the initial low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates when they cannot sell or refinance at the lower property value.

Have questions about mortgage loans? Call us at (478) 746-2063. We answer questions about different types of loans every day.

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