Fixed versus adjustable loans

With a fixed-rate loan, your monthly payment never changes for the life of your loan. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally payment amounts on a fixed-rate loan will increase very little.

Early in a fixed-rate loan, a large percentage of your payment pays interest, and a significantly smaller part goes to principal. The amount applied to principal increases up slowly every month.

You can choose a fixed-rate loan to lock in a low rate. Borrowers select these types of loans because interest rates are low and they wish to lock in the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at a good 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 usually adjust every six months, based on various indexes.

Most Adjustable Rate Mortgages feature this cap, which means they can't go up above a certain amount in a given period. Some ARMs won'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 your monthly payment can go up in a given period. Plus, the great majority of ARMs have a "lifetime cap" — this cap means that the interest rate can't ever exceed the capped amount.

ARMs most often have the lowest rates toward the start of the loan. They provide the lower interest rate for an initial period that varies greatly. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are best for people who expect to move within three or five years. These types of adjustable rate loans most benefit borrowers who will move before the initial lock expires.

You might choose an Adjustable Rate Mortgage to get a very low initial rate and count on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs can be risky in a down market because homeowners could be 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. We answer questions about different types of loans every day.

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