Differences between fixed and adjustable loans

With a fixed-rate loan, your monthly payment never changes for the entire duration of the loan. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance will increase over time, but generally, payments on fixed rate loans vary little.

Your first few years of payments on a fixed-rate loan go primarily toward interest. As you pay , more of your payment is applied to principal.

Borrowers can choose a fixed-rate loan in order to lock in a low rate. Borrowers select 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 with a fixed-rate loan can provide greater 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 a good rate. Call Cottingham Mortgage Inc. at (800) 288-9693 to discuss how we can help.

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

Most programs have a cap that protects you from sudden monthly payment increases. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which ensures that your payment will not increase beyond a fixed amount in a given year. In addition, almost all ARMs feature a "lifetime cap" — this cap means that the rate can't go over the capped amount.

ARMs most often feature their lowest rates at the beginning of the loan. They guarantee that interest rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust after the initial period. Loans like this are usually best for borrowers who anticipate moving within three or five years. These types of adjustable rate loans are best for people who plan to move before the loan adjusts.

Most people who choose ARMs choose them because they want to take advantage of lower introductory rates and do not plan to remain in the house longer than the initial low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up if they cannot sell or refinance at the 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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