Differences between fixed and adjustable rate loans

With a fixed-rate loan, your payment never changes for the entire duration of the loan. The portion allocated to principal (the loan amount) increases, however, the amount you pay in interest will go down in the same amount. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but for the most part, payments on fixed rate loans vary little.

When you first take out a fixed-rate loan, most of the payment is applied to interest. This proportion reverses as the loan ages.

You might choose a fixed-rate loan in order to lock in a low rate. Borrowers select fixed-rate loans when interest rates are low and they want to lock in at the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call Firelight Mortgage Consultants at 7209331025 to learn more.

Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. ARMs are generally adjusted every six months, based on various indexes.

Most ARM programs have a cap that protects you from sudden increases in monthly payments. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which guarantees your payment won't go above a certain amount over the course of a given year. The majority of ARMs also cap your interest rate over the life of the loan.

ARMs most often have the lowest rates at the start. They usually guarantee the lower interest rate from a month to ten years. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the initial rate is set 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 usually best for borrowers who expect to move within three or five years. These types of adjustable rate loans are best for borrowers who plan to move before the initial lock expires.

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

Have questions about mortgage loans? Call us at 7209331025. We answer questions about different types of loans every day.