Differences between adjustable and fixed rate loans

With a fixed-rate loan, your payment stays the same for the entire duration of your mortgage. 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 monthly payments for a fixed-rate mortgage will be very stable.

When you first take out a fixed-rate mortgage loan, most of the payment is applied to interest. As you pay on the loan, more of your payment is applied to principal.

You can choose a fixed-rate loan to lock in a low rate. Borrowers choose fixed-rate loans when interest rates are low and they want to lock in the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at the best rate currently available. Call VSI Home Lending at (260) 338-2561 for details.

There are many different kinds of Adjustable Rate Mortgages. Generally, interest rates on ARMs are determined by an outside index. A few of these are: the 6-month CD rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

The majority of ARMs are capped, so they can't increase over a certain amount in a given period. There may be a cap on how much your interest rate can increase in one period. For example: no more than two percent per year, even if the index the rate is based on increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that the payment can go up in one period. The majority of ARMs also cap your interest rate over the life of the loan period.

ARMs most often feature the lowest rates at the start. They usually provide that interest rate for an initial period that varies greatly. You've probably read about 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then they adjust. Loans like this are usually best for people who anticipate moving in three or five years. These types of adjustable rate programs are best for people who will move before the loan adjusts.

You might choose an Adjustable Rate Mortgage to take advantage of a very low initial interest rate and count on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs can be risky if property values decrease and borrowers cannot sell or refinance their loan.

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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