Differences between fixed and adjustable loans

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With a fixed-rate loan, your monthly payment doesn't change for the entire duration of the loan. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but for the most part, payment amounts on fixed rate loans don't increase much.

When you first take out a fixed-rate loan, the majority your payment goes toward interest. This proportion reverses itself as the loan ages.

Borrowers can choose a fixed-rate loan to lock in a low interest rate. Borrowers select fixed-rate 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 provide more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at the best rate currently available. Call Primebank in Le Mars at 712-546-4175, in Sioux Center at 712-722-4545, or in Sioux City at 712-224-5400 for details.

There are many different types of Adjustable Rate Mortgages. ARMs are normally adjusted twice a year, based on various indexes.

Most programs have a "cap" that protects you from sudden monthly payment increases. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than two percent per year, even if the underlying index goes up by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount that the payment can increase in one period. Additionally, almost all adjustable programs have a "lifetime cap" — the interest rate can't ever go over the capped percentage.

ARMs most often have the lowest, most attractive rates toward the start of the loan. They provide that rate for an initial period that varies greatly. You've probably heard of 5/1 or 3/1 ARMs. For these loans, the introductory rate is fixed for three or five years. After this period it 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 borrowers who anticipate moving in three or five years. These types of adjustable rate programs benefit borrowers who plan to move before the initial lock expires.

Most people who choose ARMs do so when they want to take advantage of lower introductory rates and do not plan on staying in the home for any longer than this introductory low-rate period. ARMs can be risky in a down market because homeowners could be stuck with rates that go up if they cannot sell their home or refinance with a lower property value.

Have questions about mortgage loans? Call us in Le Mars at 712-546-4175, in Sioux Center at 712-722-4545, or in Sioux City at 712-224-5400. We answer questions about different types of loans every day.