Differences between adjustable and fixed rate loans

With a fixed-rate loan, your monthly payment never changes for the life of the loan. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally monthly payments for a fixed-rate loan will increase very little.

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

You can choose a fixed-rate loan in order to lock in a low interest rate. People choose these types of loans because interest rates are low and they wish to lock in this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at the best rate currently available. Call Mortgage Contract Services Inc at 9705329896 to learn more.

There are many different types of Adjustable Rate Mortgages. Generally, the interest rates on ARMs are determined by a federal index. A few of these are: the 6-month CD rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARMs feature this cap, so they won't increase above a certain amount in a given period. There may be a cap on interest rate increases over the course of a year. For example: no more than a couple percent a year, even though the underlying index goes up by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount your monthly payment can increase in one period. Plus, the great majority of ARM programs feature a "lifetime cap" — the rate won't exceed the capped amount.

ARMs most often have the lowest rates toward the start of the loan. They guarantee the lower rate from a month to ten years. You've likely heard of 5/1 or 3/1 ARMs. In these loans, the initial rate is set for three or five years. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust. Loans like this are best for people who expect to move in three or five years. These types of ARMs benefit borrowers who plan to move before the initial lock expires.

Most borrowers who choose ARMs do so when they want to get lower introductory rates and do not plan to stay in the house for any longer than the introductory low-rate period. ARMs can be risky in a down market because homeowners can get stuck with increasing rates if they can't sell their home or refinance with a lower property value.

Have questions about mortgage loans? Call us at 9705329896. We answer questions about different types of loans every day.