Differences between fixed and adjustable rate loans

A fixed-rate loan features a fixed payment amount over the life of the loan. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but generally, payment amounts on these types of loans vary little.

Early in a fixed-rate loan, most of your payment pays interest, and a significantly smaller percentage goes to principal. As you pay , more of your payment goes toward principal.

Borrowers might choose a fixed-rate loan to lock in a low rate. Borrowers choose fixed-rate loans when interest rates are low and they wish to lock in this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call Chase Mortgage at 435-755-6622 for details.

Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. ARMs are generally adjusted twice a year, based on various indexes.

The majority of ARMs feature this cap, which means they can't increase over a certain amount in a given period of time. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than a couple percent per year, even if the index the rate is based on goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount that the monthly payment can increase in a given period. Almost all ARMs also cap your rate over the life of the loan.

ARMs most often feature the lowest, most attractive rates toward the start. They usually provide the lower rate from a month to ten years. You've probably read about 5/1 or 3/1 ARMs. For these loans, the initial rate is set for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are usually best for borrowers who anticipate moving within three or five years. These types of ARMs benefit people who plan to move before the loan adjusts.

Most people who choose ARMs do so because they want to take advantage of lower introductory rates and don't plan on staying in the house for any longer than the initial low-rate period. ARMs can be risky if property values go down and borrowers cannot sell their home 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!