Differences between fixed and adjustable rate loans

A fixed-rate loan features the same payment amount for the entire duration of your loan. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part payment amounts for a fixed-rate loan will be very stable.

Early in a fixed-rate loan, most of your monthly payment pays interest, and a significantly smaller part goes to principal. The amount paid toward principal increases up gradually every month.

Borrowers can choose a fixed-rate loan to lock in a low interest rate. Borrowers select fixed-rate loans because interest rates are low and they want to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at a good rate. Call Hawk Mortgage Group at (443) 619-7900 to learn more.

Adjustable Rate Mortgages — ARMs, come in a great number of varieties. Generally, the interest on ARMs are based on a federal index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the 1 year rate on Treasure Securities, 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 increases in monthly payments. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than a couple percent a year, even if the index the rate is based on increases by more than two percent. Sometimes an ARM features a "payment cap" that ensures your payment won't increase beyond a fixed amount in a given year. Plus, the great majority of ARMs feature a "lifetime cap" — the rate will never exceed the capped amount.

ARMs most often feature their lowest, most attractive rates toward the start of the loan. They provide that rate for an initial period that varies greatly. You've likely heard of 5/1 or 3/1 ARMs. In these loans, the initial rate is set for three or five years. It then adjusts every year. These loans are fixed for a number of years (3 or 5), then they adjust. These loans are best for people who anticipate moving within three or five years. These types of adjustable rate programs benefit borrowers who plan to move before the initial lock expires.

Most borrowers who choose ARMs do so when they want to take advantage of lower introductory rates and don't plan to stay in the house for any longer than the initial low-rate period. ARMs can be risky in a down market because homeowners can get stuck with increasing rates if they can't sell their home 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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