Differences between fixed and adjustable rate loans

With a fixed-rate loan, your monthly payment remains the same for the life of your mortgage. The amount of the payment that goes to your principal (the actual loan amount) will go up, however, the amount you pay in interest will decrease in the same amount. The property tax and homeowners insurance will increase over time, but for the most part, payment amounts on these types of loans vary little.

During the early amortization period of a fixed-rate loan, most of your payment goes toward interest, and a much smaller part goes to principal. As you pay , more of your payment is applied to principal.

You can choose a fixed-rate loan in order to lock in a low interest rate. People choose fixed-rate loans because interest rates are low and they want to lock in this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at a favorable rate. Call Washingtonian Mortgage, LLC at 410-451-2755 to learn more.

There are many different kinds of Adjustable Rate Mortgages. ARMs are generally adjusted every six months, based on various indexes.

Most ARM programs feature a cap that protects borrowers from sudden monthly payment increases. Some ARMs won't increase more than two percent 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 the payment can go up in a given period. The majority of ARMs also cap your rate over the life of the loan period.

ARMs most often have their lowest rates at the beginning. They guarantee the lower rate from a month to ten years. You've probably heard of 5/1 or 3/1 ARMs. For these loans, the introductory rate is fixed 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 expect to move within three or five years. These types of ARMs benefit borrowers who will move before the initial lock expires.

You might choose an ARM to get a lower initial rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs are risky when property values decrease and borrowers can't sell their home or refinance their loan.

Have questions about mortgage loans? Call us at 410-451-2755. We answer questions about different types of loans every day.