Adjustable versus fixed rate loans

With a fixed-rate loan, your monthly payment remains the same for the entire duration of your loan. The portion allocated to principal (the actual loan amount) will go up, however, your interest payment will decrease accordingly. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally monthly payments for your fixed-rate mortgage will be very stable.

When you first take out a fixed-rate mortgage loan, the majority the payment is applied to interest. The amount paid toward your principal amount goes up gradually every month.

You can choose a fixed-rate loan to lock in a low rate. Borrowers choose fixed-rate loans because interest rates are low and they want to lock in this low rate. For homeowners who have an ARM now, refinancing into 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 Hawk Mortgage Group at (443) 619-7900 to discuss how we can help.

Adjustable Rate Mortgages — ARMs, come in even more varieties. Generally, the interest for ARMs are based on an outside index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most programs feature a cap that protects you from sudden monthly payment increases. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that ensures your payment won't increase beyond a fixed amount in a given year. Almost all ARMs also cap your rate over the life of the loan.

ARMs most often feature the lowest rates at the beginning of the loan. They usually provide that rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These types of loans are fixed for a number of years (3 or 5), then they adjust. Loans like this are usually best for people who expect to move within three or five years. These types of adjustable rate loans are best for people who will move before the loan adjusts.

You might choose an Adjustable Rate Mortgage to take advantage of a lower introductory interest rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky in a down market because homeowners can get stuck with increasing rates when they can't sell their home or refinance at the 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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