Differences between fixed and adjustable rate loans

A fixed-rate loan features the same payment for the entire duration of your loan. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part payments on a fixed-rate mortgage will be very stable.

Early in a fixed-rate loan, most of your payment pays interest, and a significantly smaller percentage toward principal. The amount paid toward principal goes up gradually every month.

You can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select fixed-rate loans when interest rates are low and they want to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call South County Mortgage at (401) 583-4150 to learn more.

Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. ARMs usually adjust twice a year, based on various indexes.

Most ARM programs feature a "cap" that protects borrowers from sudden monthly payment increases. There may be a cap on interest rate increases over the course of a year. For example: no more than two percent a year, even if the index the rate is based on goes up by more than two percent. Sometimes an ARM features a "payment cap" that guarantees your payment will not go above a fixed amount over the course of a given year. The majority of ARMs also cap your interest rate over the duration of the loan period.

ARMs most often have their lowest rates at the start. They usually provide the lower rate from a month to ten years. You may hear people talking 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 they adjust. Loans like this are often best for people who expect to move in three or five years. These types of adjustable rate programs most benefit borrowers who plan to move before the initial lock expires.

Most borrowers who choose ARMs do so when they want to get lower introductory rates and do not plan to remain in the home for any longer than this initial low-rate period. ARMs can be risky when property values decrease and borrowers cannot sell their home or refinance.

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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