Differences between fixed and adjustable loans

With a fixed-rate loan, your monthly payment remains the same for the entire duration of your mortgage. The amount of the payment that goes to your principal (the amount you borrowed) increases, but the amount you pay in interest will decrease in the same amount. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part payment amounts on a fixed-rate mortgage will be very stable.

Your first few years of payments on a fixed-rate loan go primarily toward interest. That reverses itself as the loan ages.

Borrowers might choose a fixed-rate loan to lock in a low interest rate. People choose fixed-rate loans when interest rates are low and they want to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at the best rate currently available. Call MidTowne Mortgage at (478) 746-2063 to learn more.

Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. Generally, the interest rates on ARMs are based on a federal index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most Adjustable Rate Mortgages are capped, so they can't go up above a specific amount in a given period of time. Some ARMs won't increase more than two percent 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 your payment can go up in one period. Plus, the great majority of ARMs have a "lifetime cap" — the interest rate can't go over the capped percentage.

ARMs usually start 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 fixed for three or five years. After this period it adjusts every year. These loans are fixed for a certain number of years (3 or 5), then adjust after the initial period. These loans are often best for people who anticipate moving within three or five years. These types of ARMs are best for borrowers who will sell their house or refinance before the loan adjusts.

You might choose an ARM to take advantage of a lower introductory interest rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up when they cannot sell their home or refinance with a 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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