Differences between adjustable and fixed loans

A fixed-rate loan features a fixed payment amount over the life of the loan. The property tax 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 don't increase much.

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

You might choose a fixed-rate loan in order to lock in a low rate. Borrowers choose these types of loans because interest rates are low and they want to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at the best rate currently available. Call Cottingham Mortgage Inc. at (800) 288-9693 for details.

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

Most Adjustable Rate Mortgages are capped, which means they won't go up above a certain amount in a given period. Some ARMs can't increase more than 2% 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 increase in one period. Most ARMs also cap your rate over the duration of the loan.

ARMs most often feature their lowest rates at the start of the loan. They usually guarantee the lower rate for an initial period that varies greatly. 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 a number of years (3 or 5), then adjust. Loans like this are usually best for people who expect to move within three or five years. These types of adjustable rate loans benefit borrowers who plan to sell their house or refinance before the initial lock expires.

Most people who choose ARMs do so because they want to take advantage of lower introductory rates and don't plan to stay in the home longer than this introductory low-rate period. ARMs are risky if property values decrease and borrowers cannot sell their home or refinance their loan.

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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