Adjustable versus fixed rate loans

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A fixed-rate loan features a fixed 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, payments on these types of loans vary little.

During the early amortization period of a fixed-rate loan, most of your monthly payment goes toward interest, and a significantly smaller part toward principal. As you pay on the loan, more of your payment goes toward principal.

You might choose a fixed-rate loan to lock in a low rate. Borrowers choose these types of loans because interest rates are low and they want to lock in this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at a favorable rate. Call Commonwealth Mortgage & Investments, Inc. at 8047689519 for details.

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

The majority of Adjustable Rate Mortgages are capped, which means they can't go up over a specified amount in a given period. Some ARMs can't adjust 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 that the payment can go up in one period. Additionally, the great majority of ARMs have a "lifetime cap" — your interest rate won't go over the cap amount.

ARMs most often have the lowest, most attractive rates toward the beginning of the loan. They guarantee that interest rate from a month to ten years. You've likely read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust. Loans like this are best for people who anticipate moving within three or five years. These types of adjustable rate loans benefit borrowers who will sell their house or refinance before the loan adjusts.

You might choose an Adjustable Rate Mortgage to get a very low introductory interest rate and count 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 cannot sell their home or refinance.

Have questions about mortgage loans? Call us at 8047689519. We answer questions about different types of loans every day.