Differences between adjustable and fixed rate loans

A fixed-rate loan features the same payment amount for the entire duration of your loan. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but in general, payments on these types of loans vary little.

Early in a fixed-rate loan, a large percentage of your monthly payment pays interest, and a much smaller percentage toward principal. The amount applied to your principal amount increases up gradually every month.

You might choose a fixed-rate loan in order to lock in a low rate. People select these types of loans because interest rates are low and they wish to lock in this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at a good rate. Call Metro Mortgage at 866-300-1550 for details.

Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, the interest for ARMs are determined by a federal index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the 1 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 above a certain amount in a given period of time. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than a couple percent per year, even though the index the rate is based on increases by more than two percent. Sometimes an ARM has a "payment cap" that guarantees your payment can't increase beyond a certain amount in a given year. Additionally, almost all ARM programs have a "lifetime cap" — your rate can't go over the cap amount.

ARMs most often feature their lowest rates toward the beginning of the loan. They provide that rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These types of loans are fixed for a certain number of years (3 or 5), then they adjust after the initial period. Loans like this are often best for people who expect to move in three or five years. These types of adjustable rate programs most benefit borrowers who plan to sell their house or refinance before the loan adjusts.

Most borrowers who choose ARMs do so when they want to take advantage of lower introductory rates and do not plan on staying in the house for any longer than this initial low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates if they cannot sell or refinance at the lower property value.

Have questions about mortgage loans? Call us at 866-300-1550. We answer questions about different types of loans every day.

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