Differences between adjustable and fixed loans

With a fixed-rate loan, your monthly payment stays the same for the life of the mortgage. The amount that goes for principal (the loan amount) goes up, but your interest payment will decrease in the same amount. The property taxes and homeowners insurance will go up over time, but for the most part, payment amounts on these types of loans vary little.

When you first take out a fixed-rate loan, most of your payment goes toward interest. That gradually reverses itself as the loan ages.

Borrowers might choose a fixed-rate loan to lock in a low interest rate. People choose these types of loans because interest rates are low and they wish to lock in the low 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 help you lock in a fixed-rate at a favorable rate. Call MidTowne Mortgage at (478) 746-2063 to discuss how we can help.

There are many kinds of Adjustable Rate Mortgages. Generally, interest rates for ARMs are determined by a federal index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

The majority of Adjustable Rate Mortgages are capped, which means they can't increase over a specified 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 feature a "payment cap" that instead of capping the interest directly, caps the amount your payment can increase in one period. The majority of ARMs also cap your interest rate over the life of the loan period.

ARMs usually start out at a very low rate that usually increases over time. You've likely heard of 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 in three or five years. These types of adjustable rate loans most benefit people who plan to move before the initial lock expires.

You might choose an Adjustable Rate Mortgage to take advantage of a lower introductory interest rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs are risky when property values go down and borrowers can't sell or refinance.

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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