Differences between adjustable and fixed loans

A fixed-rate loan features the same payment amount over the life of your loan. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but in general, payment amounts on fixed rate loans vary little.

Your first few years of payments on a fixed-rate loan are applied primarily toward interest. As you pay on the loan, more of your payment goes toward principal.

You might choose a fixed-rate loan to lock in a low interest rate. Borrowers select 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 with a fixed-rate loan can provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at a favorable rate. Call Prime Capital Mortgage Corp at 248-644-1200 for details.

There are many kinds of Adjustable Rate Mortgages. Generally, interest rates on ARMs are based on a federal index. Some examples of outside indexes are: the 6-month CD rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARM programs feature a "cap" that protects you from sudden monthly payment increases. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that guarantees your payment can't go above a fixed amount in a given year. Additionally, the great majority of adjustable programs feature a "lifetime cap" — the rate can't go over the cap percentage.

ARMs most often have the lowest, most attractive rates at the start of the loan. They usually provide the lower interest rate from a month to ten years. You've likely read about 5/1 or 3/1 ARMs. For these loans, the initial rate is set for three or five years. It then adjusts every year. These loans are fixed for a certain number of years (3 or 5), then adjust after the initial period. Loans like this are usually best for borrowers who anticipate moving within three or five years. These types of adjustable rate programs most benefit people 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 on remaining in the house longer than this initial low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up if they cannot sell their home or refinance at the lower property value.

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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