Differences between adjustable and fixed rate loans

A fixed-rate loan features a fixed payment amount over the life of your loan. Your property taxes increase, or rarely, decrease, and so might the homeowner’s insurance in your monthly payment. For the most part payments for your fixed-rate mortgage will be very stable.

Early in a fixed-rate loan, most of your monthly payment pays interest, and a much smaller percentage goes to principal. That gradually reverses as the loan ages.

You might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose fixed-rate loans when interest rates are low and they wish to lock in the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we’ll be glad to assist you in locking a fixed-rate at a good rate. Call All American Home Mortgage at (702) 794-4300 to learn more.

Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, interest on ARMs are based on an outside index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank’s 11th District Cost of Funds Index (COFI), or others.

The majority of Adjustable Rate Mortgages are capped, which means they won’t increase over a specified amount in a given period of time. Some ARMs can’t adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a “payment cap” which guarantees your payment won’t  increase beyond a fixed amount in a given year. Additionally, almost all ARMs have a “lifetime cap” — this cap means that your interest rate won’t go over the cap percentage.

fixed page image 2.1ARMs most often feature the lowest, most attractive rates toward the beginning. They usually provide that rate for an initial period that varies greatly. You’ve probably read about 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are often best for people who expect to move within three or five years. These types of adjustable rate loans are best for people who will move before the initial lock expires.

You might choose an Adjustable Rate Mortgage to get a lower initial interest rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs are risky when property values go down and borrowers cannot sell their home or refinance their loan.

Have questions about mortgage loans? Call us at (702) 794-4300. It’s our job to answer these questions and many others, so we’re happy to help!