Fixed versus adjustable rate loans

With a fixed-rate loan, your monthly payment never changes for the life of your mortgage. The amount that goes to principal (the actual loan amount) will go up, but the amount you pay in interest will go down in the same amount. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part payment amounts on a fixed-rate mortgage will be very stable.

Your first few years of payments on a fixed-rate loan go mostly to pay interest. That reverses as the loan ages.

You might choose a fixed-rate loan in order to lock in a low rate. Borrowers select fixed-rate loans because interest rates are low and they want to lock in at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call PREMIERE MORTGAGE SERVICES INC. at 978-422-2311 for details.

There are many different types of Adjustable Rate Mortgages. Generally, the interest rates on ARMs are based on a federal index. A few of these are: the 6-month CD rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most programs have 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 a couple percent per year, even though the index the rate is based on increases by more than two percent. Sometimes an ARM has a "payment cap" which ensures that your payment will not go above a certain amount in a given year. Almost all ARMs also cap your interest rate over the life of the loan.

ARMs most often have the lowest, most attractive rates toward the start of the loan. They guarantee that rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial 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 they adjust. These loans are often best for people who anticipate moving in three or five years. These types of adjustable rate loans benefit borrowers who will move before the loan adjusts.

You might choose an Adjustable Rate Mortgage to get a lower introductory rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. ARMs are risky if property values decrease and borrowers are unable to sell or refinance their loan.

Have questions about mortgage loans? Call us at 978-422-2311. We answer questions about different types of loans every day.