Differences between adjustable and fixed loans

With a fixed-rate loan, your payment stays the same for the entire duration of your mortgage. The portion that goes to your principal (the actual loan amount) goes up, but your interest payment will go down in the same amount. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally monthly payments on a fixed-rate loan will be very stable.

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

Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose these types of loans when interest rates are low and they wish to lock in at this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at the best rate currently available. Call Saab Mortgage at 703-288-0777 for details.

There are many different types of Adjustable Rate Mortgages. ARMs are generally adjusted twice a year, based on various indexes.

Most programs feature a cap that protects you from sudden monthly payment increases. There may be a cap on interest rate variances over the course of a year. For example: no more than two percent a year, even though the underlying index increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount your payment can go up in one period. Plus, the great majority of ARM programs have a "lifetime cap" — this means that your interest rate can't exceed the cap percentage.

ARMs most often have their lowest, most attractive rates at the beginning of the loan. They usually provide the lower interest rate for an initial period that varies greatly. You've likely read about 5/1 or 3/1 ARMs. In these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for a certain number of years (3 or 5), then adjust after the initial period. Loans like this are usually best for people who anticipate moving in three or five years. These types of adjustable rate loans benefit people who will move before the loan adjusts.

Most borrowers who choose ARMs do so when they want to take advantage of lower introductory rates and don't plan on staying in the house longer than the initial low-rate period. ARMs can be risky in a down market because homeowners could be stuck with increasing rates if they can't sell or refinance at the lower property value.

Have questions about mortgage loans? Call us at 703-288-0777. It's our job to answer these questions and many others, so we're happy to help!

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