Adjustable versus fixed rate loans

A fixed-rate loan features the same payment amount for the entire duration of your loan. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally monthly payments for a fixed-rate loan will increase very little.

When you first take out a fixed-rate mortgage loan, most of your payment is applied to interest. This proportion gradually reverses itself as the loan ages.

You can choose a fixed-rate loan to lock in a low interest rate. People choose these types of loans when interest rates are low and they want to lock in at the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at a favorable 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 many varieties. Generally, the interest for ARMs are based on a federal index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most programs have a "cap" that protects you from sudden monthly payment increases. There may be a cap on how much your interest rate can go up in one period. For example: no more than two percent a year, even though the underlying index goes up by more than two percent. Sometimes an ARM has a "payment cap" which ensures your payment won't increase beyond a fixed amount in a given year. In addition, almost all adjustable programs have a "lifetime cap" — this cap means that the rate can't ever exceed the cap percentage.

ARMs usually start at a very low rate that usually increases as the loan ages. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are usually best for borrowers who expect to move in three or five years. These types of ARMs are best for borrowers who will sell their house or refinance before the initial lock expires.

You might choose an Adjustable Rate Mortgage to take advantage of a lower introductory rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up when 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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