Differences between adjustable and fixed loans

With a fixed-rate loan, your monthly payment remains the same for the life of the loan. The longer you pay, the more of your payment goes toward principal. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally payment amounts for a fixed-rate mortgage will increase very little.

Your first few years of payments on a fixed-rate loan are applied mostly toward interest. The amount applied to your principal amount goes up slowly each month.

You can choose a fixed-rate loan to lock in a low interest rate. Borrowers select fixed-rate loans when interest rates are low and they wish to lock in the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at a favorable rate. Call Middleton Website Test Services at 4058873713 for details.

There are many different types of Adjustable Rate Mortgages. Generally, interest for ARMs are determined by a federal index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARM programs feature a cap that protects borrowers from sudden increases in monthly payments. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount that the monthly payment can go up in a given period. In addition, almost all ARMs have a "lifetime cap" — your interest rate can't ever exceed the cap percentage.

ARMs most often feature the lowest rates at the beginning of the loan. They usually provide the lower rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for a certain number of years (3 or 5), then adjust after the initial period. Loans like this are best for borrowers who expect to move in three or five years. These types of adjustable rate programs benefit borrowers who plan to sell their house or refinance before the initial lock expires.

Most borrowers who choose ARMs choose them when they want to take advantage of lower introductory rates and do not plan on remaining in the home longer than the initial low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up if they cannot sell or refinance at the lower property value.

Have questions about mortgage loans? Call us at 4058873713. We answer questions about different types of loans every day.