Differences between fixed and adjustable loans

With a fixed-rate loan, your payment doesn't change for the life of your mortgage. The amount that goes for principal (the loan amount) goes up, but the amount you pay in interest will decrease accordingly. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part payments for a fixed-rate mortgage will be very stable.

Your first few years of payments on a fixed-rate loan are applied mostly to pay interest. The amount applied to principal increases up slowly every month.

You might choose a fixed-rate loan in order to lock in a low interest rate. People select fixed-rate loans because interest rates are low and they wish to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more 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 for details.

There are many different types of Adjustable Rate Mortgages. ARMs are generally adjusted every six months, based on various indexes.

Most ARM programs feature a "cap" that protects borrowers from sudden monthly payment increases. Some ARMs won't increase more than two percent per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount the monthly payment can increase in a given period. Most ARMs also cap your rate over the life of the loan period.

ARMs usually start out at a very low rate that may increase over time. You've likely heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is set 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 they adjust after the initial period. Loans like this are usually best for borrowers who expect to move within three or five years. These types of adjustable rate programs most benefit borrowers who plan to move before the loan adjusts.

Most people who choose ARMs choose them when they want to take advantage of lower introductory rates and don't plan to remain in the home longer than the initial low-rate period. ARMs can be risky if property values decrease and borrowers are unable to sell their home or refinance.

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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