Fixed versus adjustable loans

A fixed-rate loan features a fixed payment for the entire duration of your mortgage. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part payment amounts on a fixed-rate loan will be very stable.

During the early amortization period of a fixed-rate loan, a large percentage of your payment goes toward interest, and a much smaller percentage toward principal. As you pay , more of your payment is applied to principal.

Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select fixed-rate loans when interest rates are low and they wish to lock in this lower rate. If you have an Adjustable Rate Mortgage (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 can assist you in locking a fixed-rate at a good rate. Call Prime Capital Mortgage Corp at 248-644-1200 for details.

Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. ARMs usually adjust twice a year, based on various indexes.

Most programs have a cap that protects you from sudden increases in monthly payments. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which guarantees that your payment won't go above a fixed amount over the course of a given year. The majority of ARMs also cap your interest rate over the duration of the loan.

ARMs usually start out at a very low rate that usually increases as the loan ages. You may have heard about "3/1 ARMs" or "5/1 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 3 or 5 years, then adjust. These loans are usually best for people who anticipate moving within three or five years. These types of ARMs are best for people who will sell their house or refinance before the initial lock expires.

Most borrowers who choose ARMs choose them when they want to get lower introductory rates and do not plan on staying in the home for any longer than this introductory low-rate period. ARMs can be risky in a down market because homeowners can get stuck with rates that go up if they can't sell their home or refinance with a 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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