Differences between fixed and adjustable loans

A fixed-rate loan features a fixed payment for the entire duration of the loan. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. For the most part payment amounts on a fixed-rate loan will increase very little.

Your first few years of payments on a fixed-rate loan are applied primarily to pay interest. This proportion gradually reverses as the loan ages.

Borrowers can choose a fixed-rate loan to lock in a low interest rate. People select fixed-rate loans when interest rates are low and they want to lock in at the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at the best rate currently available. Call Prime Capital Mortgage Corp at 248-644-1200 to discuss your situation with one of our professionals.

Adjustable Rate Mortgages — ARMs, come in many varieties. ARMs are normally adjusted every six months, based on various indexes.

Most ARMs feature this cap, which means they can't increase above a specified amount in a given period of time. There may be a cap on how much your interest rate can increase in one period. For example: no more than two percent per year, even if the index the rate is based on increases by more than two percent. Sometimes an ARM has a "payment cap" which guarantees your payment will not go above a certain amount over the course of a given year. In addition, almost all ARM programs have a "lifetime cap" — this means that the rate can never go over the capped percentage.

ARMs most often have their lowest, most attractive rates at the start. They guarantee the lower interest rate for an initial period that varies greatly. You've probably read about 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. It then adjusts every year. These types of loans are fixed for a number of years (3 or 5), then adjust after the initial period. Loans like this are usually best for borrowers who expect to move in three or five years. These types of adjustable rate loans most benefit people who plan to move before the initial lock expires.

You might choose an Adjustable Rate Mortgage to get a very low initial rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs are risky when property values decrease and borrowers cannot sell or refinance their loan.

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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