Fixed versus adjustable loans

With a fixed-rate loan, your monthly payment doesn't change for the entire duration of your loan. The amount that goes to your principal (the loan amount) increases, but your interest payment will decrease in the same amount. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but in general, payment amounts on fixed rate loans change little over the life of the loan.

Your first few years of payments on a fixed-rate loan go primarily toward interest. As you pay on the loan, more of your payment goes toward principal.

You can choose a fixed-rate loan in order to lock in a low rate. Borrowers select fixed-rate loans when interest rates are low and they wish to lock in at the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at the best rate currently available. Call South County Mortgage at (401) 583-4150 to discuss how we can help.

Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. ARMs are normally adjusted every six months, based on various indexes.

Most ARM programs feature a "cap" that protects you from sudden monthly payment increases. Some ARMs can't increase more than two percent per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount your payment can go up in a given period. Additionally, the great majority of ARM programs feature a "lifetime cap" — this cap means that the interest rate won't go over the cap percentage.

ARMs usually start at a very low rate that may increase over time. You've probably read about 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 adjust. These loans are usually best for people who anticipate moving within three or five years. These types of adjustable rate loans most benefit borrowers who will move before the initial lock expires.

You might choose an ARM to get a lower introductory interest rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. 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 with a lower property value.

Have questions about mortgage loans? Call us at (401) 583-4150. We answer questions about different types of loans every day.

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