Differences between fixed and adjustable rate loans

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A fixed-rate loan features the same payment amount for the entire duration of your mortgage. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but in general, payment amounts on fixed rate loans vary little.

At the beginning of a a fixed-rate loan, most of the payment goes toward interest. As you pay on the loan, more of your payment goes toward principal.

You might choose a fixed-rate loan in order to lock in a low rate. Borrowers choose fixed-rate loans when 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 consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at a good rate. Call The Dave Radke Team at Standard Bank and Trust at 3128069309 to discuss your situation with one of our professionals.

Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. ARMs are generally adjusted twice a year, based on various indexes.

The majority of Adjustable Rate Mortgages feature this cap, so they won't increase above a specific amount in a given period of time. 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 if the underlying index increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount that the payment can increase in a given period. Additionally, the great majority of ARM programs feature a "lifetime cap" — the interest rate won't go over the capped percentage.

ARMs usually start at a very low rate that may increase as the loan ages. You've likely read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These loans are fixed for a certain number of years (3 or 5), then adjust after the initial period. These loans are best for people who anticipate moving within three or five years. These types of adjustable rate programs benefit people who plan to move before the loan adjusts.

You might choose an Adjustable Rate Mortgage to take advantage of a lower initial rate and count on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs can be risky in a down market because homeowners could be stuck with increasing rates when they cannot sell or refinance at the lower property value.

Have questions about mortgage loans? Call us at 3128069309. It's our job to answer these questions and many others, so we're happy to help!