Differences between fixed and adjustable loans

A fixed-rate loan features a fixed payment amount for the entire duration of the mortgage. The property taxes and homeowners insurance will increase over time, but in general, payments on fixed rate loans change little over the life of the loan.

At the beginning of a a fixed-rate mortgage loan, the majority the payment goes toward 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 select these types of loans because interest rates are low and they want to lock in at the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call Hawk Mortgage Group at (443) 619-7900 for details.

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

Most ARMs feature this cap, which means they can't increase over a specific amount in a given period. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than two percent per year, even though the index the rate is based on increases by more than two percent. Sometimes an ARM has a "payment cap" which guarantees that your payment won't increase beyond a certain amount over the course of a given year. Additionally, the great majority of adjustable programs feature a "lifetime cap" — your rate can't go over the cap percentage.

ARMs most often feature the lowest rates toward the start of the loan. They guarantee that rate from a month to ten years. You've likely read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust. Loans like this are best for borrowers who anticipate moving within three or five years. These types of adjustable rate loans most benefit borrowers who plan to move before the initial lock expires.

Most borrowers who choose ARMs choose them because they want to take advantage of lower introductory rates and don't plan to remain in the house longer than this introductory 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 at the lower property value.

Have questions about mortgage loans? Call us at (443) 619-7900. It's our job to answer these questions and many others, so we're happy to help!

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