Differences between fixed and adjustable loans

With a fixed-rate loan, your payment stays the same for the entire duration of your mortgage. The amount that goes for principal (the amount you borrowed) increases, however, the amount you pay in interest will decrease accordingly. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but in general, payments on these types of loans vary little.

Early in a fixed-rate loan, a large percentage of your payment pays interest, and a much smaller percentage toward principal. The amount paid toward principal increases up gradually every month.

You might choose a fixed-rate loan to lock in a low rate. People choose fixed-rate loans because interest rates are low and they wish to lock in at this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at the best rate currently available. Call Cottingham Mortgage Inc. at (800) 288-9693 to discuss your situation with one of our professionals.

Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. Generally, the interest rates for ARMs are based on a federal index. A few of these are: the 6-month CD rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most programs have a cap that protects you from sudden monthly payment increases. There may be a cap on how much your interest rate can increase in one period. For example: no more than a couple percent per year, even if the underlying index goes up by more than two percent. Sometimes an ARM features a "payment cap" that guarantees your payment can't increase beyond a fixed amount in a given year. The majority of ARMs also cap your interest rate over the duration of the loan.

ARMs usually start out at a very low rate that usually increases as the loan ages. You may have heard about "3/1 ARMs" or "5/1 ARMs". In 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 usually best for people who expect to move in three or five years. These types of adjustable rate programs benefit borrowers who plan to move before the initial lock expires.

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

Have questions about mortgage loans? Call us at (800) 288-9693. It's our job to answer these questions and many others, so we're happy to help!

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