Adjustable versus fixed loans

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A fixed-rate loan features the same payment for the entire duration of your loan. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally monthly payments for your fixed-rate mortgage will increase very little.

At the beginning of a a fixed-rate loan, the majority your payment is applied to interest. As you pay on the loan, more of your payment is applied to principal.

You can choose a fixed-rate loan to lock in a low rate. People select fixed-rate loans when interest rates are low and they wish to lock in this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), Tom would love to assist you in locking a fixed-rate at a good rate. Call Tom at 1-708-647-5240 to learn more.

There are many types of Adjustable Rate Mortgages. Generally, the interest rates for ARMs are based on an outside index. Some examples of outside indexes are: the 6-month CD rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARM programs have a cap that protects borrowers from sudden increases in monthly payments. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that guarantees your payment won't increase beyond a fixed amount over the course of a given year. Plus, the great majority of ARM programs have a "lifetime cap" — this cap means that the interest rate can never exceed the capped amount.

ARMs most often feature their lowest, most attractive rates toward the start. They provide the lower interest rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust. Loans like this are best for people who anticipate moving in three or five years. These types of ARMs most benefit people who plan to sell their house or refinance before the initial lock expires.

You might choose an ARM to take advantage of a lower initial interest rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs can be risky if property values go down and borrowers can't sell their home or refinance.

Have questions about mortgage loans? Call Tom at 1-708-647-5240. He answers questions about different types of loans every day.