Adjustable versus fixed rate loans

A fixed-rate loan features a fixed payment for the entire duration of the loan. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally monthly payments on your fixed-rate mortgage will be very stable.

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

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

Adjustable Rate Mortgages — ARMs, come in a great number of varieties. Generally, the interest rates for ARMs are based on an outside index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARM programs feature a "cap" that protects you from sudden monthly payment increases. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than a couple percent a year, even though the index the rate is based on goes up by more than two percent. Sometimes an ARM features a "payment cap" which guarantees that your payment can't go above a certain amount over the course of a given year. The majority of ARMs also cap your rate over the life of the loan period.

ARMs usually start at a very low rate that may increase over time. You may have heard 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 types of loans are fixed for 3 or 5 years, then adjust. These loans are often best for people who anticipate moving in three or five years. These types of ARMs most benefit borrowers who plan to move before the initial lock expires.

You might choose an Adjustable Rate Mortgage to get a lower introductory rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. ARMs are risky when property values go down and borrowers are unable to sell or refinance.

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