Differences between fixed and adjustable rate loans

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

At the beginning of a a fixed-rate mortgage loan, most of your payment is applied to interest. The amount applied to principal increases up slowly every month.

You can choose a fixed-rate loan to lock in a low rate. Borrowers choose these types of loans because interest rates are low and they want to lock in the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at the best rate currently available. Call VSI Home Lending at 2603382561 for details.

Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. Generally, the interest rates on ARMs are based on a federal index. A few of these are: the 6-month CD rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARMs are capped, which means they can't increase above a specific amount in a given period. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. 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. Plus, almost all adjustable programs feature a "lifetime cap" — your rate won't exceed the cap amount.

ARMs most often feature their lowest, most attractive rates at the beginning. They provide the lower interest rate from a month to ten years. 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 types of loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are often best for borrowers who anticipate moving within three or five years. These types of adjustable rate programs benefit borrowers who plan to move before the initial lock expires.

You might choose an ARM to take advantage of a lower initial rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. ARMs can be risky when property values go down and borrowers are unable to sell their home or refinance their loan.

Have questions about mortgage loans? Call us at 2603382561. It's our job to answer these questions and many others, so we're happy to help!

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