Adjustable versus fixed loans

A fixed-rate loan features the same payment for the entire duration of your loan. The property taxes and homeowners insurance will go up over time, but for the most part, payments on fixed rate loans change little over the life of the loan.

When you first take out a fixed-rate loan, the majority the payment goes toward interest. The amount applied to principal goes up gradually every month.

You can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose fixed-rate loans because interest rates are low and they want to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at a good rate. Call Saab Mortgage at 703-288-0777 to learn more.

Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs are generally adjusted every six months, based on various indexes.

Most Adjustable Rate Mortgages feature this cap, so they won't go up over a specified amount in a given period. Some ARMs can't adjust more than 2% 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 the payment can go up in one period. Additionally, the great majority of adjustable programs have a "lifetime cap" — this cap means that your rate won't exceed the capped amount.

ARMs most often feature their lowest, most attractive rates toward the beginning of the loan. They usually provide the lower rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These kinds of loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are often best for borrowers who anticipate moving in three or five years. These types of adjustable rate programs are best for borrowers who plan to sell their house or refinance before the loan adjusts.

You might choose an Adjustable Rate Mortgage to take advantage of a lower introductory rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs are risky when property values decrease and borrowers are unable to sell or refinance.

Have questions about mortgage loans? Call us at 703-288-0777. We answer questions about different types of loans every day.

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