Differences between fixed and adjustable rate loans

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

Your first few years of payments on a fixed-rate loan are applied mostly toward interest. That reverses itself as the loan ages.

You might choose a fixed-rate loan to lock in a low rate. Borrowers choose fixed-rate loans when interest rates are low and they want to lock in the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more 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 the best rate currently available. Call Carter Financial Solutions at 866-840-8745 x2 to discuss how we can help.

There are many different types of Adjustable Rate Mortgages. ARMs are normally adjusted every six months, based on various indexes.

Most ARM programs feature a "cap" that protects borrowers from sudden increases in monthly payments. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount your monthly payment can go up in one period. Plus, almost all adjustable programs feature a "lifetime cap" — the interest rate can't ever go over the cap percentage.

ARMs usually start at a very low rate that may increase over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are best for people who anticipate moving within three or five years. These types of adjustable rate programs most benefit borrowers who will sell their house or refinance before the initial lock expires.

Most borrowers who choose ARMs do so when they want to get lower introductory rates and don't plan on remaining in the house longer than this initial low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up if they can't sell their home or refinance at the lower property value.

Have questions about mortgage loans? Call us at 866-840-8745 x2. We answer questions about different types of loans every day.

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