Differences between adjustable and fixed loans

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

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

You can choose a fixed-rate loan to lock in a low rate. Borrowers select fixed-rate loans because 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 more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at a good rate. Call Prime Capital Mortgage Corp at 248-644-1200 to discuss how we can help.

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

Most 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" which guarantees that your payment won't increase beyond a fixed amount over the course of a given year. In addition, the great majority of ARMs have a "lifetime cap" — the rate can't ever go over the cap amount.

ARMs most often have the lowest rates at the start of the loan. They guarantee the lower rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 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 certain number of years (3 or 5), then adjust after the initial period. These loans are often best for people who anticipate moving in three or five years. These types of adjustable rate loans are best for people who plan to sell their house or refinance before the loan adjusts.

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