Differences between fixed and adjustable rate loans

A fixed-rate loan features the same payment amount over the life of the loan. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but in general, payments on these types of loans change little over the life of the loan.

During the early amortization period of a fixed-rate loan, most of your monthly payment pays interest, and a significantly smaller percentage toward principal. The amount applied to principal increases up slowly every month.

You can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose these types of loans because interest rates are low and they want to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at the best rate currently available. Call American Mortgage Services at 9018401400 to learn more.

There are many types of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.

The majority of Adjustable Rate Mortgages feature this cap, so they can't go up over a certain amount in a given period. Some ARMs can't increase more than two percent per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount the monthly payment can go up in one period. Additionally, almost all adjustable programs feature a "lifetime cap" — your interest rate will never exceed the capped amount.

ARMs usually start at a very low rate that usually increases as the loan ages. You've likely read about 5/1 or 3/1 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 a certain number of years (3 or 5), then they adjust after the initial period. These loans are best for people who anticipate moving within three or five years. These types of adjustable rate loans benefit people who will move before the initial lock expires.

You might choose an Adjustable Rate Mortgage to get a lower introductory rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs are risky if property values go down and borrowers can't sell or refinance.

Have questions about mortgage loans? Call us at 9018401400. We answer questions about different types of loans every day.