Differences between fixed and adjustable loans

A fixed-rate loan features the same payment over the life of your loan. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but generally, payments on fixed rate loans don't increase much.

At the beginning of a a fixed-rate mortgage loan, most of the payment is applied to interest. The amount applied to your principal amount goes up gradually every month.

Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose these types of loans when interest rates are low and they wish to lock in at this lower 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 help you lock in a fixed-rate at a favorable rate. Call Chase Mortgage at 435-755-6622 to discuss your situation with one of our professionals.

Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs are normally adjusted twice a year, based on various indexes.

Most ARM programs have a "cap" that protects you from sudden increases in monthly payments. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that your monthly payment can increase in one period. Additionally, the great majority of ARM programs have a "lifetime cap" — this cap means that the rate can't ever go over the cap percentage.

ARMs most often have the lowest rates toward the start. They usually guarantee the lower 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 certain number of years (3 or 5), then they adjust after the initial period. These loans are usually best for borrowers who anticipate moving in three or five years. These types of adjustable rate loans benefit people who plan to move before the initial lock expires.

You might choose an Adjustable Rate Mortgage to get a lower initial rate and count on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky if property values go down and borrowers are unable to sell or refinance their loan.

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!