Differences between adjustable and fixed rate loans

With a fixed-rate loan, your payment never changes for the life of your mortgage. The longer you pay, the more of your payment goes toward principal. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally payments on your fixed-rate loan will be very stable.

Your first few years of payments on a fixed-rate loan go mostly toward interest. This proportion reverses itself as the loan ages.

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 wish to lock in the low rate. For homeowners who have an ARM now, refinancing into 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 a favorable rate. Call Hawk Mortgage Group at (443) 619-7900 for details.

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

The majority of ARMs are capped, which means they can't increase above a specific amount in a given period of time. Some ARMs won't increase more than two percent per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that the monthly payment can increase in a given period. The majority of ARMs also cap your rate over the duration of the loan.

ARMs most often have the lowest, most attractive rates toward the beginning of the loan. They usually provide the lower rate from a month to ten years. You've probably read about 5/1 or 3/1 ARMs. For these loans, the introductory 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 adjust after the initial period. These loans are best for borrowers who expect to move within three or five years. These types of ARMs benefit borrowers who plan to sell their house or refinance before the loan adjusts.

Most borrowers who choose ARMs choose them when they want to take advantage of lower introductory rates and do not plan to stay in the house longer than the 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 or refinance with a lower property value.

Have questions about mortgage loans? Call us at (443) 619-7900. We answer questions about different types of loans every day.

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