Differences between fixed and adjustable loans

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With a fixed-rate loan, your monthly payment remains the same for the entire duration of the mortgage. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally monthly payments for your fixed-rate mortgage will increase very little.

Early in a fixed-rate loan, a large percentage of your payment goes toward interest, and a significantly smaller part goes to principal. The amount paid toward principal increases up gradually every month.

You might choose a fixed-rate loan to lock in a low rate. Borrowers select these types of loans when interest rates are low and they wish to lock in at the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater stability 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 a good rate. Call First Mortgage Corp at 7086475246 to discuss your situation with one of our professionals.

Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. Generally, interest rates for ARMs are determined by an outside index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

The majority of ARMs are capped, which means they can't go up above 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 rate directly, caps the amount your monthly payment can go up in one period. Additionally, the great majority of ARMs feature a "lifetime cap" — the interest rate can't go over the cap percentage.

ARMs most often have their lowest rates at the start of the loan. They usually guarantee that rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set for three or five years. It then adjusts every year. These types of loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are often best for borrowers who anticipate moving within three or five years. These types of adjustable rate programs benefit people who plan to move before the loan adjusts.

Most people who choose ARMs choose them when they want to get lower introductory rates and don't plan on remaining in the house for any longer than the initial low-rate period. ARMs can be risky in a down market because homeowners can get stuck with increasing rates when they can't sell their home or refinance with a lower property value.

Have questions about mortgage loans? Call Mike at 708-647-5246. We answer questions about different types of loans every day.