Differences between adjustable and fixed loans

A fixed-rate loan features a fixed payment over the life of your loan. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally payment amounts on a fixed-rate mortgage will be very stable.

At the beginning of a a fixed-rate loan, most of your payment goes toward interest. The amount applied to your principal amount goes up slowly each month.

You can choose a fixed-rate loan in order to lock in a low rate. Borrowers choose fixed-rate 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 provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at a good rate. Call South County Mortgage at (401) 583-4150 to discuss your situation with one of our professionals.

There are many different kinds of Adjustable Rate Mortgages. Generally, interest for ARMs are determined by a federal index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARM programs have a cap that protects borrowers from sudden monthly payment increases. Some ARMs can't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that ensures your payment can't go above a certain amount in a given year. The majority of ARMs also cap your interest rate over the duration of the loan.

ARMs usually start out at a very low rate that may increase as the loan ages. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is fixed for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are best for borrowers who expect to move within three or five years. These types of ARMs are best for borrowers who plan to sell their house or refinance before the loan adjusts.

Most people who choose ARMs choose them when they want to take advantage of lower introductory rates and don't plan on remaining in the house for any longer than this initial low-rate period. ARMs can be risky in a down market because homeowners could be stuck with increasing rates when they cannot sell or refinance with a lower property value.

Have questions about mortgage loans? Call us at (401) 583-4150. It's our job to answer these questions and many others, so we're happy to help!

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