Fixed versus adjustable loans

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With a fixed-rate loan, your payment never changes for the entire duration of your mortgage. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but in general, payment amounts on these types of loans don't increase much.

During the early amortization period of a fixed-rate loan, a large percentage of your payment pays interest, and a much smaller percentage toward principal. The amount paid toward your principal amount goes up gradually each month.

You might choose a fixed-rate loan to lock in a low interest rate. Borrowers select these types of loans when interest rates are low and they wish to lock in the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at the best rate currently available. Call The Mortgage Advantage, Inc. at 480-831-1588 to learn more.

Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. ARMs usually adjust every six months, based on various indexes.

The majority of Adjustable Rate Mortgages feature this cap, so they can't increase above a specific amount in a given period. There may be a cap on how much your interest rate can go up in one period. For example: no more than two percent per year, even if the index the rate is based on goes up by more than two percent. Sometimes an ARM has a "payment cap" that guarantees that your payment won't increase beyond a fixed amount over the course of a given year. Plus, almost all ARMs have a "lifetime cap" — the interest rate can never go over the capped percentage.

ARMs most often have their lowest rates at the beginning of the loan. They usually provide that interest rate for an initial period that varies greatly. You've probably heard of 5/1 or 3/1 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 adjust after the initial period. These loans are best for borrowers who expect to move in three or five years. These types of adjustable rate programs most benefit borrowers who will move before the initial lock expires.

Most borrowers who choose ARMs do so because they want to get lower introductory rates and don't plan on remaining in the home for any longer than the initial low-rate period. ARMs can be risky when property values decrease and borrowers can't sell or refinance their loan.