Differences between fixed and adjustable loans

A fixed-rate loan features the same payment for the entire duration of the mortgage. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part monthly payments on your fixed-rate loan will increase very little.

At the beginning of a a fixed-rate loan, most of your payment is applied to interest. This proportion gradually reverses itself as the loan ages.

You might choose a fixed-rate loan to lock in a low rate. Borrowers select fixed-rate loans when interest rates are low and they want to lock in at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, 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 kinds of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.

Most Adjustable Rate Mortgages feature this cap, which means they won't go up over a specific amount in a given period. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than a couple 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 rate directly, caps the amount the monthly payment can increase in one period. Most ARMs also cap your rate over the life of the loan.

ARMs usually start at a very low rate that may increase as the loan ages. You've probably heard of 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 types of loans are fixed for 3 or 5 years, then adjust. These loans are often best for people who expect to move within three or five years. These types of adjustable rate programs benefit people who plan to move before the loan adjusts.

Most people who choose ARMs choose them when they want to get lower introductory rates and do not plan on remaining in the house longer than this initial low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates when they can't sell their home or refinance with a lower property value.

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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