Differences between adjustable and fixed loans

A fixed-rate loan features the same payment amount over the life of the mortgage. The property tax and homeowners insurance will increase over time, but generally, payments on fixed rate loans change little over the life of the loan.

Early in a fixed-rate loan, a large percentage of your payment pays interest, and a significantly smaller part goes to principal. That gradually reverses itself as the loan ages.

Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose fixed-rate loans because interest rates are low and they want to lock in at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with 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 a favorable rate. Call Prime Capital Mortgage Corp at 248-644-1200 for details.

Adjustable Rate Mortgages — ARMs, come in a great number of varieties. Generally, the interest rates on ARMs are based on an outside index. Some examples of outside indexes are: the 6-month CD rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most programs feature a "cap" that protects you from sudden monthly payment increases. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than two percent per year, even if the underlying index increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount that the monthly payment can increase in one period. Most ARMs also cap your rate over the life of the loan.

ARMs usually start out at a very low rate that usually increases over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory 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. These loans are best for borrowers who anticipate moving in three or five years. These types of ARMs are best for borrowers who will move before the initial lock expires.

Most people who choose ARMs choose them when they want to get lower introductory rates and don't plan to stay in the home longer than the introductory 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 us at 248-644-1200. We answer questions about different types of loans every day.

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