Differences between adjustable and fixed rate loans

A fixed-rate loan features a fixed payment for the entire duration of the mortgage. The property taxes and homeowners insurance will go up over time, but generally, payments on fixed rate loans vary little.

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

Borrowers can choose a fixed-rate loan to lock in a low interest rate. Borrowers select these types of loans because 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 greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call Prime Capital Mortgage Corp at 248-644-1200 for details.

There are many different kinds of Adjustable Rate Mortgages. Generally, the interest for ARMs are determined by 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 ARM programs feature a cap that protects borrowers from sudden increases in monthly payments. There may be a cap on interest rate variances over the course of a year. For example: no more than a couple percent a year, even though the index the rate is based on goes up by more than two percent. Sometimes an ARM features a "payment cap" which ensures your payment will not go above a certain amount over the course of a given year. Most ARMs also cap your rate over the duration of the loan.

ARMs most often have their lowest rates at the beginning. They usually guarantee that rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is set for three or five years. It then adjusts every year. These types of loans are fixed for 3 or 5 years, then adjust. Loans like this are usually best for people who anticipate moving within 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 get a lower initial interest rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. ARMs are risky when property values go down and borrowers can't 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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