Differences between fixed and adjustable rate loans

With a fixed-rate loan, your monthly payment never changes for the entire duration of the loan. The longer you pay, the more of your payment goes toward principal. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally payments on a fixed-rate mortgage will increase very little.

At the beginning of a a fixed-rate mortgage loan, the majority your payment is applied to interest. This proportion reverses itself as the loan ages.

Borrowers can choose a fixed-rate loan to lock in a low interest rate. People choose fixed-rate loans when 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 more 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 the best rate currently available. Call Channel Mortgage LLC at (718) 639-9500 to discuss how we can help.

Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. ARMs usually adjust every six months, based on various indexes.

The majority of ARMs are capped, so they won't go up above a specified amount in a given period of time. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount your payment can go up in one period. Plus, almost all ARM programs feature a "lifetime cap" — this means that your rate can't ever go over the cap percentage.

ARMs usually start out at a very low rate that usually increases over time. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set for three or five years. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then they adjust. Loans like this are often best for borrowers who anticipate moving within three or five years. These types of adjustable rate programs most benefit borrowers who plan to move before the loan adjusts.

Most people who choose ARMs choose them when they want to take advantage of lower introductory rates and don't plan to remain in the house for any longer than this initial low-rate period. ARMs can be risky when housing prices go down 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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