Differences between adjustable and fixed loans

A fixed-rate loan features the same payment over the life of the loan. The property tax and homeowners insurance will go up over time, but for the most part, payments on these types of loans vary little.

At the beginning of a a fixed-rate mortgage loan, most of your payment goes toward interest. That reverses itself as the loan ages.

You might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select these types of loans when interest rates are low and they want to lock in the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at a good rate. Call MidTowne Mortgage at (478) 746-2063 to learn more.

Adjustable Rate Mortgages — ARMs, come in even more varieties. Generally, interest rates on ARMs are determined by 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, which means they can't go up over 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 per year, even though the underlying index goes up by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that the payment can go up in a given period. In addition, almost all ARM programs have a "lifetime cap" — this means that your rate can never exceed the capped percentage.

ARMs most often have their lowest rates toward the beginning. They usually guarantee that rate from a month to ten years. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the initial rate is set for three or five years. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust. These loans are best for people who expect to move in three or five years. These types of ARMs are best for borrowers who will sell their house or refinance before the initial lock expires.

You might choose an Adjustable Rate Mortgage to take advantage of a very low introductory interest rate and plan on moving, refinancing or absorbing the higher rate after the introductory 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 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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