Differences between fixed and adjustable loans

A fixed-rate loan features a fixed payment over the life of the loan. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally payments on a fixed-rate loan will increase very little.

Your first few years of payments on a fixed-rate loan go primarily toward interest. The amount paid toward your principal amount increases up slowly each month.

You might choose a fixed-rate loan in order to lock in a low interest rate. People choose these types of loans when interest rates are low and they wish to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at the best rate currently available. Call Great Mortgage NMLS#478647 at 708.966.9005 for details.

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

Most Adjustable Rate Mortgages are capped, which means they won't go up over a specified amount in a given period. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that guarantees your payment can't go above a fixed amount in a given year. The majority of ARMs also cap your rate over the duration of the loan.

ARMs most often feature their lowest rates at the beginning. They provide 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 3 or 5 years, then they adjust after the initial period. These loans are often best for borrowers who expect to move in three or five years. These types of ARMs are best for people who will move before the initial lock expires.

You might choose an ARM to take advantage of a very low initial rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky in a down market because homeowners could be stuck with increasing rates if they cannot sell or refinance at the lower property value.

Have questions about mortgage loans? Call us at 708.966.9005. It's our job to answer these questions and many others, so we're happy to help!

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