Differences between fixed and adjustable rate loans

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

When you first take out a fixed-rate mortgage loan, the majority the payment goes toward interest. The amount applied to principal increases up slowly every month.

You might choose a fixed-rate loan to lock in a low rate. People choose these types of loans when interest rates are low and they want to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide 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 Firelight Mortgage Consultants at 7209331025 to learn more.

There are many types of Adjustable Rate Mortgages. ARMs are generally adjusted every six months, based on various indexes.

Most ARM programs have a cap that protects borrowers from sudden monthly payment increases. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than two percent a year, even if the underlying index increases by more than two percent. Sometimes an ARM features a "payment cap" which ensures your payment will not go above a fixed amount over the course of a given year. In addition, almost all ARMs feature a "lifetime cap" — the interest rate can never exceed the cap percentage.

ARMs usually start at a very low rate that usually increases over time. 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 types of loans are fixed for 3 or 5 years, then adjust. These loans are best for people who expect to move in three or five years. These types of adjustable rate programs are best for people who plan to sell their house or refinance before the initial lock expires.

You might choose an Adjustable Rate Mortgage to take advantage of a lower initial rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs can be risky in a down market because homeowners could be stuck with rates that go up if they can't sell their home or refinance at the lower property value.

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