Differences between fixed and adjustable rate loans

With a fixed-rate loan, your payment never changes for the life of the loan. The longer you pay, the more of your payment goes toward principal. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part payment amounts on a fixed-rate loan will be very stable.

Your first few years of payments on a fixed-rate loan go mostly to pay interest. That reverses as the loan ages.

Borrowers can choose a fixed-rate loan to lock in a low interest rate. Borrowers choose these types of loans because interest rates are low and they want to lock in at this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater stability in monthly payments. 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 Allstar Brokers Network DBA InnoDuet at 800-998-6003 to discuss how we can help.

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

The majority of Adjustable Rate Mortgages feature this cap, which means they won't increase over a specified amount in a given period. Some ARMs won'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 that the payment can increase in a given period. Most ARMs also cap your interest rate over the life of the loan period.

ARMs usually start out at a very low rate that usually increases as the loan ages. You've probably heard of 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for a number of years (3 or 5), then adjust. Loans like this are often best for borrowers who expect to move in three or five years. These types of adjustable rate programs benefit people who will move before the loan adjusts.

You might choose an ARM to take advantage of a lower introductory interest rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates when they cannot sell or refinance with a lower property value.