Differences between fixed and adjustable loans

A fixed-rate loan features the same payment amount over the life of your mortgage. 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 loan will be very stable.

During the early amortization period of a fixed-rate loan, a large percentage of your payment goes toward interest, and a much smaller percentage goes to principal. As you pay on the loan, more of your payment is applied to principal.

Borrowers can choose a fixed-rate loan in order to lock in a low rate. Borrowers select these types of loans because interest rates are low and they want to lock in 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'll be glad to assist you in locking a fixed-rate at a good rate. Call Saab Mortgage at 7032880777 for details.

There are many different kinds of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.

The majority of ARMs are capped, so they can't increase over a specified amount in a given period. Some ARMs can't increase 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 monthly payment can go up in one period. Additionally, the great majority of adjustable programs have a "lifetime cap" — this means that the interest rate will never exceed the cap amount.

ARMs usually start out at a very low rate that may increase as the loan ages. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is fixed for three or five years. It then adjusts every year. These types of loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are best for people who expect to move in three or five years. These types of adjustable rate loans are best for borrowers who will move before the initial lock expires.

Most borrowers who choose ARMs choose them when they want to get lower introductory rates and do not plan to remain in the house longer than this introductory low-rate period. ARMs are risky if property values decrease and borrowers cannot sell or refinance.

Have questions about mortgage loans? Call us at 7032880777. We answer questions about different types of loans every day.

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