Differences between adjustable and fixed loans

With a fixed-rate loan, your payment never changes for the entire duration of your mortgage. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance will increase over time, but for the most part, payment amounts on these types of loans don't increase much.

Your first few years of payments on a fixed-rate loan are applied primarily to pay interest. The amount applied to principal goes up gradually each month.

Borrowers can choose a fixed-rate loan to lock in a low interest rate. People select these types of loans because interest rates are low and they want to lock in at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at a favorable rate. Call VSI Home Lending at (260) 338-2561 to learn more.

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

The majority of Adjustable Rate Mortgages feature this cap, which means they can't increase above a specific amount in a given period of time. There may be a cap on how much your interest rate can go up in one period. For example: no more than a couple percent a year, even though the underlying index increases by more than two percent. Sometimes an ARM has a "payment cap" that guarantees your payment won't increase beyond a fixed amount over the course of a given year. Almost all ARMs also cap your rate over the life of the loan.

ARMs usually start out at a very low rate that usually increases over time. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These kinds of loans are fixed for a number of years (3 or 5), then they adjust. Loans like this are best for borrowers who expect to move in three or five years. These types of adjustable rate loans benefit people who plan to sell their house or refinance before the initial lock expires.

Most people who choose ARMs choose them when they want to get lower introductory rates and don't plan to stay in the home longer than this introductory low-rate period. ARMs are risky if property values decrease and borrowers cannot sell their home or refinance.

Have questions about mortgage loans? Call us at (260) 338-2561. We answer questions about different types of loans every day.

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