Differences between adjustable and fixed rate loans

A fixed-rate loan features a fixed payment over the life of your loan. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part payment amounts on a fixed-rate mortgage will increase very little.

Your first few years of payments on a fixed-rate loan are applied primarily toward interest. That reverses as the loan ages.

Borrowers might choose a fixed-rate loan in order to lock in a low rate. Borrowers choose fixed-rate loans when interest rates are low and they want to lock in at this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater stability in monthly payments. 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, as we called them above — come in a great number of varieties. ARMs usually adjust twice a year, based on various indexes.

Most Adjustable Rate Mortgages feature this cap, so they won't go up above a specified amount in a given period of time. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which ensures your payment won't go above a fixed amount over the course of a given year. The majority of ARMs also cap your rate over the duration of the loan period.

ARMs usually start out at a very low rate that may increase as the loan ages. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are usually best for borrowers who anticipate moving in three or five years. These types of ARMs are best for borrowers who will move before the initial lock expires.

You might choose an ARM to take advantage of a very low initial interest rate and plan on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates if they cannot sell 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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