Fixed versus adjustable loans

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With a fixed-rate loan, your monthly payment remains the same for the life of the mortgage. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but for the most part, payment amounts on these types of loans change little over the life of the loan.

During the early amortization period of a fixed-rate loan, most of your monthly payment pays interest, and a significantly smaller part toward principal. This proportion reverses as the loan ages.

Borrowers might choose a fixed-rate loan to lock in a low interest rate. People select these types of loans because interest rates are low and they wish to lock in this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at a favorable rate. Call Custom Mortgage Services, Inc. at 678-992-0100 to learn more.

There are many types of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.

The majority of ARMs are capped, which means they can't go up over a certain amount in a given period. There may be a cap on how much your interest rate can go up in one period. For example: no more than two 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 directly, caps the amount that the monthly payment can go up in one period. In addition, almost all adjustable programs feature a "lifetime cap" — your rate won't exceed the capped amount.

ARMs most often feature their lowest, most attractive rates at the beginning. They provide the lower rate from a month to ten years. 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. Loans like this are best for people who expect to move in three or five years. These types of ARMs benefit borrowers who plan to move before the loan adjusts.

Most people who choose ARMs do so when they want to take advantage of lower introductory rates and don't plan on remaining in the house for any longer than the initial low-rate period. ARMs can be risky if property values go down and borrowers cannot sell their home or refinance.

Have questions about mortgage loans? Call us at 678-992-0100. We answer questions about different types of loans every day.