Fixed versus adjustable loans

A fixed-rate loan features the same payment amount for the entire duration of the loan. The property tax and homeowners insurance will go up over time, but in general, payments on fixed rate loans don't increase much.

At the beginning of a a fixed-rate loan, most of your payment is applied to interest. As you pay on the loan, more of your payment is applied to principal.

Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. People select these types of loans because interest rates are low and they want to lock in at this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at a favorable rate. Call Cottingham Mortgage Inc. at (800) 288-9693 to learn more.

Adjustable Rate Mortgages — ARMs, come in a great number of varieties. ARMs are normally adjusted twice a year, based on various indexes.

Most Adjustable Rate Mortgages feature this cap, so they can't increase over a specified amount in a given period. Some ARMs can't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that ensures that your payment will not increase beyond a fixed amount over the course of a given year. Plus, almost all ARM programs feature a "lifetime cap" — your interest rate can never go over the capped amount.

ARMs most often feature the lowest, most attractive rates toward the start. They usually provide that rate from a month to ten years. You've probably read about 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. It then adjusts every year. These types of loans are fixed for a certain number of years (3 or 5), then they adjust after the initial period. Loans like this are best for people who anticipate moving in three or five years. These types of adjustable rate programs most benefit people who will move before the initial lock expires.

You might choose an Adjustable Rate Mortgage to take advantage of a lower introductory interest rate and count on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates when they can't sell or refinance at the lower property value.

Have questions about mortgage loans? Call us at (800) 288-9693. We answer questions about different types of loans every day.

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