Fixed versus adjustable rate loans

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With a fixed-rate loan, your payment doesn't change for the entire duration of the loan. The portion of the payment allocated to principal (the loan amount) will go up, however, the amount you pay in interest will go down accordingly. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but generally, payments on fixed rate loans vary little.

Your first few years of payments on a fixed-rate loan go primarily toward interest. As you pay , more of your payment is applied to principal.

You might choose a fixed-rate loan to lock in a low interest rate. Borrowers select fixed-rate loans when interest rates are low and they wish to lock in at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call First Capital Mortgage at 2815651246 to learn more.

Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. Generally, interest for ARMs are determined by a federal index. Some examples of outside indexes 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 programs have a cap that protects borrowers from sudden increases in monthly payments. There may be a cap on how much your interest rate can go up in one period. For example: no more than two percent a year, even if the index the rate is based on increases by more than two percent. Sometimes an ARM has a "payment cap" that ensures that your payment can't increase beyond a fixed amount in a given year. The majority of ARMs also cap your rate over the duration of the loan period.

ARMs most often have their lowest, most attractive rates at the start. They provide that rate for an initial period that varies greatly. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These types of loans are fixed for a number of years (3 or 5), then adjust after the initial period. Loans like this are usually best for people who anticipate moving within three or five years. These types of adjustable rate loans most benefit people who plan to sell their house or refinance before the loan adjusts.

Most borrowers who choose ARMs choose them when they want to get lower introductory rates and do not plan to stay in the house longer than the introductory low-rate period. ARMs can be risky if property values go down and borrowers can't sell their home or refinance.

Have questions about mortgage loans? Call us at 2815651246. We answer questions about different types of loans every day.