Differences between adjustable and fixed loans

With a fixed-rate loan, your payment doesn't change for the life of your loan. The amount of the payment allocated to your principal (the actual loan amount) goes up, however, your interest payment will go down accordingly. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally monthly payments on a fixed-rate mortgage will increase very little.

During the early amortization period of a fixed-rate loan, most of your monthly payment goes toward interest, and a much smaller percentage toward principal. That gradually reverses itself as the loan ages.

You can choose a fixed-rate loan to lock in a low rate. Borrowers select these types of loans when interest rates are low and they want to lock in the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at a favorable rate. Call Washingtonian Mortgage, LLC at 410-451-2755 for details.

Adjustable Rate Mortgages — ARMs, come in even more varieties. Generally, interest for ARMs are based on an outside index. Some examples of outside indexes are: the 6-month CD rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

The majority of Adjustable Rate Mortgages feature this cap, which means they can't increase over a specific amount in a given period of time. There may be a cap on interest rate increases over the course of a year. For example: no more than two percent per year, even if the index the rate is based on increases by more than two percent. Sometimes an ARM features a "payment cap" that ensures your payment will not go above a certain amount in a given year. In addition, the great majority of ARM programs have a "lifetime cap" — this cap means that the rate won't go over the cap percentage.

ARMs usually start out at a very low rate that may increase over time. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust. These loans are often best for people who anticipate moving within three or five years. These types of adjustable rate programs are best for people who plan to move before the initial lock expires.

You might choose an Adjustable Rate Mortgage to take advantage of a lower initial rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. ARMs can be risky in a down market because homeowners could be stuck with rates that go up if they can't sell their home or refinance at the lower property value.

Have questions about mortgage loans? Call us at 410-451-2755. It's our job to answer these questions and many others, so we're happy to help!