Differences between fixed and adjustable loans

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

Your first few years of payments on a fixed-rate loan go mostly to pay interest. The amount applied to your principal amount goes up gradually each month.

Borrowers can choose a fixed-rate loan in order to lock in a low rate. Borrowers choose fixed-rate loans because interest rates are low and they want to lock in the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call Equity Edge Mortgage, Inc. at 719-425-2226 to discuss your situation with one of our professionals.

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

Most ARM programs have 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 a couple percent per year, even though the underlying index increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that the payment can increase in a given period. Plus, the great majority of adjustable programs have a "lifetime cap" — this cap means that your rate won't exceed the cap amount.

ARMs usually start at a very low rate that may increase as the loan ages. You've likely read about 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 a certain number of years (3 or 5), then they adjust. Loans like this are often best for borrowers who expect to move in three or five years. These types of adjustable rate loans most benefit people who will sell their house or refinance before the loan adjusts.

You might choose an Adjustable Rate Mortgage to take advantage of a lower initial interest rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. ARMs can be risky in a down market because homeowners could be stuck with increasing rates if they can't sell or refinance at the lower property value.

Have questions about mortgage loans? Call us at 719-425-2226. We answer questions about different types of loans every day.