Differences between adjustable and fixed rate loans

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With a fixed-rate loan, your monthly payment remains the same for the entire duration of the mortgage. The amount of the payment allocated to your principal (the loan amount) increases, but the amount you pay in interest will go down in the same amount. The property tax and homeowners insurance will go up over time, but in general, payment amounts on these types of loans don't increase much.

During the early amortization period of a fixed-rate loan, a large percentage of your monthly payment goes toward interest, and a much smaller percentage toward principal. This proportion gradually reverses as the loan ages.

Borrowers can choose a fixed-rate loan to lock in a low rate. People choose fixed-rate loans because interest rates are low and they want to lock in at the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), Lou will be glad to help you lock in a fixed-rate at the best rate currently available. Call Lou Carrillo of The First Mortgage Corporation at 708-647-5252 to discuss how he can help.

Adjustable Rate Mortgages 

ARMs, as we called them above, come in a great number of varieties. ARMs are normally adjusted twice a year, based on various indexes.

Most ARM programs have a "cap" that protects you from sudden monthly payment increases. There may be a cap on interest rate increases over the course of a year. For example: no more than two 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 can't go above a fixed amount in a given year. Additionally, almost all adjustable programs feature a "lifetime cap" — this cap means that the rate will never go over the cap amount.

ARMs usually start at a very low rate that usually increases as the loan ages. 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. It then adjusts every year. These kinds of loans are fixed for a certain number of years (3 or 5), then they adjust. These loans are often best for borrowers who anticipate moving in three or five years. These types of adjustable rate loans 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 get lower introductory rates and do not plan to remain in the home longer than the initial low-rate period. ARMs can be risky when property values go down and borrowers are unable to sell their home or refinance.

Have questions about mortgage loans? Call Lou at 708-647-5252. We answer questions about different types of loans every day.