Differences between adjustable and fixed rate loans

With a fixed-rate loan, your payment never changes for the life of your loan. The portion allocated to your principal (the amount you borrowed) goes up, however, your interest payment will decrease in the same amount. The property tax and homeowners insurance will go up over time, but generally, payment amounts on fixed rate loans change little over the life of the loan.

Your first few years of payments on a fixed-rate loan are applied mostly toward interest. The amount applied to your principal amount increases up gradually every month.

You can choose a fixed-rate loan in order to lock in a low rate. Borrowers select fixed-rate loans because interest rates are low and they want to lock in the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking 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 kinds of Adjustable Rate Mortgages. ARMs are normally adjusted twice a year, based on various indexes.

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 increase in one period. For example: no more than a couple percent a year, even if the underlying index increases by more than two percent. Sometimes an ARM has a "payment cap" which ensures your payment will not increase beyond a fixed amount in a given year. Most ARMs also cap your interest rate over the life of the loan.

ARMs usually start at a very low rate that may increase as the loan ages. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the initial rate is fixed for three or five years. It then adjusts every year. These types 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 loans are best for borrowers who will sell their house or refinance before the loan adjusts.

You might choose an Adjustable Rate Mortgage to take advantage of a lower initial rate and count on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs can be risky in a down market because homeowners could be stuck with increasing rates if they can't sell 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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