Differences between adjustable and fixed loans

A fixed-rate loan features the same payment for the entire duration of your mortgage. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally monthly payments on your fixed-rate mortgage will be very stable.

When you first take out a fixed-rate mortgage loan, most of the payment is applied to interest. As you pay , more of your payment goes toward principal.

Borrowers can choose a fixed-rate loan in order to lock in a low rate. Borrowers select these types of loans when interest rates are low and they want to lock in the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at a good rate. Call First State Bank at 4025970500 to discuss how we can help.

Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, the interest rates for ARMs are determined by 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 ARMs are capped, which means they won't increase above a specific amount in a given period of time. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which ensures that your payment won't increase beyond a certain amount in a given year. The majority of ARMs also cap your rate over the duration of the loan.

ARMs usually start out at a very low rate that usually increases as the loan ages. You've probably read about 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 kinds of loans are fixed for a number of years (3 or 5), then they adjust. Loans like this are best for people who anticipate moving in three or five years. These types of adjustable rate programs most benefit people who will move before the loan adjusts.

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 introductory rate goes up. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates when they can't sell or refinance at the lower property value.

Have questions about mortgage loans? Call us at 4025970500. We answer questions about different types of loans every day.