Differences between fixed and adjustable loans

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With a fixed-rate loan, your payment doesn't change for the entire duration of the mortgage. The amount of the payment allocated for your principal (the amount you borrowed) increases, but your interest payment will go down in the same amount. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but generally, payments on these types of loans change little over the life of the loan.

Early in a fixed-rate loan, most of your payment pays interest, and a much smaller percentage goes to principal. The amount applied to principal goes up slowly every month.

Borrowers might choose a fixed-rate loan to lock in a low interest rate. People select fixed-rate loans when interest rates are low and they want to lock in this lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more consistency in monthly payments. 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 Integrated Financial Solutions, LLC at 410.461.4043 for details.

There are many different types of Adjustable Rate Mortgages. Generally, the interest rates on ARMs are based on a federal index. A few of these are: the 6-month CD rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most Adjustable Rate Mortgages feature this cap, which means they can't increase above a specific amount in a given period of time. Some ARMs can't increase more than two percent per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that your payment can go up in one period. The majority of ARMs also cap your interest rate over the duration of the loan period.

ARMs usually start out at a very low rate that may increase over time. You've likely heard of 5/1 or 3/1 ARMs. In these loans, the initial rate is set for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are best for borrowers who anticipate moving within three or five years. These types of adjustable rate programs most benefit borrowers who will sell their house or refinance before the loan adjusts.

Most people who choose ARMs choose them because they want to get lower introductory rates and don't plan on staying in the house longer than this initial low-rate period. ARMs can be risky when property values go down and borrowers are unable to sell or refinance their loan.

Have questions about mortgage loans? Call us at 410.461.4043. It's our job to answer these questions and many others, so we're happy to help!