Adjustable versus fixed rate loans

A fixed-rate loan features a fixed payment over the life of the loan. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but for the most part, payment amounts on fixed rate loans don't increase much.

Your first few years of payments on a fixed-rate loan are applied mostly toward interest. As you pay , more of your payment is applied to principal.

Borrowers might choose a fixed-rate loan to lock in a low interest rate. People select these types of loans because interest rates are low and they wish to lock in at the lower rate. If you have an Adjustable Rate Mortgage (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'd love to assist you in locking a fixed-rate at the best rate currently available. Call Hawk Mortgage Group at (443) 619-7900 to discuss how we can help.

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

Most ARM programs feature a "cap" that protects you from sudden increases in monthly payments. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than two percent a year, even if the index the rate is based on increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount the monthly payment can increase in one period. In addition, the great majority of ARM programs feature a "lifetime cap" — the interest rate won't go over the capped percentage.

ARMs most often feature their lowest rates at the beginning. They usually guarantee the lower interest rate for an initial period that varies greatly. You've probably heard of 5/1 or 3/1 ARMs. For these loans, the initial 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 adjust after the initial period. These loans are usually best for borrowers who anticipate moving in three or five years. These types of adjustable rate programs most benefit people who plan to move before the initial lock expires.

Most borrowers who choose ARMs choose them because they want to get lower introductory rates and do not plan to stay in the home for any longer than the introductory low-rate period. ARMs can be risky if property values go down and borrowers are unable to sell or refinance their loan.

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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