Differences between adjustable and fixed rate loans

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With a fixed-rate loan, your payment doesn't change for the entire duration of your loan. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally payments for a fixed-rate loan will be very stable.

When you first take out a fixed-rate loan, most of the payment goes toward interest. That reverses itself as the loan ages.

Borrowers might choose a fixed-rate loan in order to lock in a low rate. People select fixed-rate loans when interest rates are low and they want to lock in at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater stability in monthly payments. 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 1ST CREDENTIAL MORTGAGE INC at 2817780805 to learn more.

There are many different types of Adjustable Rate Mortgages. Generally, the interest for ARMs are determined by an outside index. A few of these are: the 6-month 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 Adjustable Rate Mortgages feature this cap, so they can't increase above a certain amount in a given period. There may be a cap on interest rate variances over the course of a year. For example: no more than two percent per year, even if the index the rate is based on goes up by more than two percent. Sometimes an ARM has a "payment cap" which guarantees your payment will not go above a certain amount in a given year. In addition, almost all adjustable programs have a "lifetime cap" — your rate can't ever go over the cap percentage.

ARMs usually start out at a very low rate that may increase over time. You've probably heard of 5/1 or 3/1 ARMs. For these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then adjust. These loans are usually best for borrowers who expect to move within three or five years. These types of adjustable rate programs benefit people who plan to move before the loan adjusts.

Most borrowers who choose ARMs choose them when they want to take advantage of lower introductory rates and do not plan on staying in the home for any longer than this initial low-rate period. ARMs are risky if property values go down and borrowers can't sell their home or refinance.

Have questions about mortgage loans? Call us at 2817780805. It's our job to answer these questions and many others, so we're happy to help!