Fixed versus adjustable rate loans

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With a fixed-rate loan, your monthly payment doesn't change for the life of the mortgage. The portion of the payment allocated for principal (the actual loan amount) will go up, however, the amount you pay in interest will decrease in the same amount. The property taxes and homeowners insurance will increase over time, but generally, payment amounts on these types of loans change little over the life of the loan.

Your first few years of payments on a fixed-rate loan are applied primarily to pay interest. The amount paid toward principal goes up gradually every month.

Borrowers might choose a fixed-rate loan to lock in a low interest rate. People choose these types of loans when interest rates are low and they want to lock in at 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 assist you in locking a fixed-rate at a favorable rate. Call AmeriFirst at (219) 947-0001 to discuss how we can help.

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

Most Adjustable Rate Mortgages are capped, which means they can't increase above a specific amount in a given period. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than two percent per year, even though the index the rate is based on goes up by more than two percent. Sometimes an ARM features a "payment cap" which ensures your payment can't increase beyond a fixed amount in a given year. Most ARMs also cap your interest rate over the life of the loan period.

ARMs most often feature their lowest rates toward the beginning. They provide that rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for a number of years (3 or 5), then adjust after the initial period. Loans like this are often best for borrowers who anticipate moving within three or five years. These types of adjustable rate loans are best for borrowers who plan to move before the initial lock expires.

Most people who choose ARMs choose them when they want to get lower introductory rates and don't plan to remain in the house longer than the initial low-rate period. ARMs are risky if property values decrease and borrowers can't sell or refinance.

Have questions about mortgage loans? Call us at (219) 947-0001. We answer questions about different types of loans every day.