Differences between fixed and adjustable rate loans

A fixed-rate loan features a fixed payment amount over the life of the mortgage. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part monthly payments for your fixed-rate mortgage will be very stable.

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

Borrowers can choose a fixed-rate loan in order to lock in a low rate. People select fixed-rate loans when interest rates are low and they wish to lock in the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at a good rate. Call Hawk Mortgage Group at (443) 619-7900 to discuss how we can help.

There are many different types of Adjustable Rate Mortgages. ARMs are normally adjusted every six months, based on various indexes.

The majority of Adjustable Rate Mortgages feature this cap, which means they won't go up above a certain amount in a given period. Some ARMs can't increase more than two percent per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount the payment can go up in a given period. Plus, the great majority of ARMs feature a "lifetime cap" — this means that your rate will never go over the capped amount.

ARMs most often feature their lowest, most attractive rates at the start of the loan. They guarantee that interest rate for an initial period that varies greatly. 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. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then adjust. These loans are often best for people who anticipate moving within three or five years. These types of adjustable rate programs most benefit people who plan to move before the initial lock expires.

You might choose an Adjustable Rate Mortgage to take advantage of a very low introductory rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up 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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