Differences between fixed and adjustable loans

A fixed-rate loan features a fixed payment amount over the life of the loan. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally payments on your fixed-rate loan will be very stable.

Your first few years of payments on a fixed-rate loan are applied mostly to pay interest. This proportion reverses as the loan ages.

You can choose a fixed-rate loan in order to lock in a low rate. People select fixed-rate loans when interest rates are low and they wish to lock in this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at a favorable rate. Call The Mortgage Exchange Service LLC at 703.255-5810 for details.

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

Most Adjustable Rate Mortgages feature this cap, which means they won't increase above a specified 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 a couple percent per year, even if the underlying index goes up by more than two percent. Sometimes an ARM features a "payment cap" that ensures your payment won't go above a fixed amount in a given year. In addition, almost all ARMs have a "lifetime cap" — this cap means that your rate won't exceed the capped percentage.

ARMs most often have their lowest rates toward the beginning. They usually guarantee that interest rate from a month to ten years. 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 kinds of loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are often best for people who anticipate moving in three or five years. These types of adjustable rate programs are best for borrowers who will sell their house or refinance before the initial lock expires.

Most borrowers who choose ARMs do so when they want to take advantage of lower introductory rates and do not plan to remain in the house for any longer than the initial low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up if they can't sell or refinance with a lower property value.

Have questions about mortgage loans? Call us at 703.255-5810. It's our job to answer these questions and many others, so we're happy to help!

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