Differences between adjustable and fixed rate loans

With a fixed-rate loan, your payment stays the same for the entire duration of your loan. The portion of the payment allocated to your principal (the loan amount) goes up, however, your interest payment will decrease accordingly. The property taxes and homeowners insurance will increase over time, but for the most part, payments on fixed rate loans don't increase much.

During the early amortization period of a fixed-rate loan, most of your payment pays interest, and a significantly smaller part toward principal. The amount applied to your principal amount increases up slowly each month.

You can choose a fixed-rate loan in order to lock in a low rate. Borrowers choose these types of loans because interest rates are low and they wish to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into 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 Firelight Mortgage Consultants at 3032282254 for details.

There are many types of Adjustable Rate Mortgages. Generally, the interest on ARMs are determined by an outside index. A few of these are: the 6-month 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 ARMs are capped, so they won't go up over a specified amount in a given period. There may be a cap on how much your interest rate can increase in one period. For example: no more than a couple percent a year, even though the index the rate is based on goes up by more than two percent. Sometimes an ARM has a "payment cap" which ensures that your payment will not increase beyond a fixed amount in a given year. Almost all ARMs also cap your interest rate over the life of the loan period.

ARMs usually start at a very low rate that may increase as the loan ages. You've likely read about 5/1 or 3/1 ARMs. In these loans, the initial rate is set for three or five years. After this period it adjusts every year. These kinds of loans are fixed for a certain number of years (3 or 5), then adjust. Loans like this are best for people 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 loan adjusts.

Most borrowers who choose ARMs do so when they want to get lower introductory rates and don't plan to stay in the home longer than the introductory low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up if they can't sell or refinance at the lower property value.

Have questions about mortgage loans? Call us at 3032282254. We answer questions about different types of loans every day.