Fixed versus adjustable loans

A fixed-rate loan features the same payment for the entire duration of your loan. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally payment amounts on your fixed-rate loan will increase very little.

Your first few years of payments on a fixed-rate loan go primarily toward interest. This proportion reverses as the loan ages.

Borrowers might choose a fixed-rate loan to lock in a low interest rate. People select these types of loans when interest rates are low and they want to lock in at the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at a good rate. Call Chase Mortgage at 435-755-6622 to learn more.

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

Most Adjustable Rate Mortgages feature this cap, so they can't increase above a specific amount in a given period of time. Some ARMs won't increase more than two percent per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount the payment can increase in a given period. Most ARMs also cap your rate over the duration of the loan.

ARMs usually start at a very low rate that may increase over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial 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. Loans like this are best for people who expect to move within 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 do so because they want to take advantage of lower introductory rates and do not plan on staying in the home longer than this introductory low-rate period. ARMs are risky when property values go down and borrowers can't sell their home or refinance.

Have questions about mortgage loans? Call us at 435-755-6622. We answer questions about different types of loans every day.