Differences between fixed and adjustable rate loans

With a fixed-rate loan, your monthly payment stays the same for the life of your loan. The amount that goes to principal (the loan amount) will go up, but the amount you pay in interest will go down accordingly. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part payments for your fixed-rate mortgage will be very stable.

When you first take out a fixed-rate mortgage loan, most of your payment goes toward interest. This proportion reverses itself as the loan ages.

You might choose a fixed-rate loan to lock in a low interest rate. People choose fixed-rate loans because interest rates are low and they wish to lock in at this 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'd love to help you lock in a fixed-rate at a favorable rate. Call Channel Mortgage LLC at (718) 639-9500 for details.

Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. ARMs usually adjust twice a year, based on various indexes.

Most programs have a "cap" that protects you from sudden monthly payment increases. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than a couple percent per year, even though the index the rate is based on goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount that your payment can increase in a given period. Additionally, the great majority of ARM programs have a "lifetime cap" — the rate can't ever exceed the capped percentage.

ARMs usually start out at a very low rate that may increase as the loan ages. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are often best for people who anticipate moving in three or five years. These types of adjustable rate loans benefit people who plan to move before the loan adjusts.

You might choose an Adjustable Rate Mortgage to get a lower initial rate and count on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky in a down market because homeowners can get stuck with rates that go up when they can't sell their home or refinance at the lower property value.

Have questions about mortgage loans? Call us at (718) 639-9500. We answer questions about different types of loans every day.

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