Adjustable versus fixed rate loans

A fixed-rate loan features a fixed payment over the life of your loan. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part payments on a fixed-rate loan will be very stable.

During the early amortization period of a fixed-rate loan, a large percentage of your monthly payment goes toward interest, and a much smaller percentage goes to principal. The amount applied to principal goes up slowly every month.

Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. People select these types of loans when interest rates are low and they wish to lock in this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at the best rate currently available. Call Chase Mortgage at 435-755-6622 for details.

There are many different types of Adjustable Rate Mortgages. Generally, the interest rates for ARMs are based on an outside index. Some examples of outside indexes are: the 6-month CD rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most programs feature a "cap" that protects borrowers from sudden increases in monthly payments. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that ensures that your payment won't go above a certain amount over the course of a given year. Almost all ARMs also cap your interest rate over the life of the loan.

ARMs most often feature the lowest rates toward the start of the loan. They usually guarantee the lower rate for an initial period that varies greatly. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the initial rate is fixed for three or five years. It then adjusts every year. These types of loans are fixed for a certain number of years (3 or 5), then they adjust after the initial period. These loans are usually best for borrowers who expect to move in three or five years. These types of adjustable rate programs benefit people who plan to move before the initial lock expires.

Most borrowers who choose ARMs choose them because they want to take advantage of lower introductory rates and do not plan on staying in the home for any longer than the initial low-rate period. ARMs are risky when property values go down and borrowers can't sell or refinance.

Have questions about mortgage loans? Call us at 435-755-6622. It's our job to answer these questions and many others, so we're happy to help!