Fixed versus adjustable rate loans

A fixed-rate loan features a fixed payment amount over the life of the mortgage. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally monthly payments on your fixed-rate mortgage will be very stable.

Early in a fixed-rate loan, a large percentage of your monthly payment goes toward interest, and a significantly smaller percentage goes to principal. The amount applied to principal goes up gradually every month.

You can choose a fixed-rate loan to lock in a low rate. People select fixed-rate loans when interest rates are low and they wish to lock in this 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 currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at a good rate. Call PREMIERE MORTGAGE SERVICES INC. at 978-422-2311 for details.

There are many different types of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.

The majority of Adjustable Rate Mortgages feature this cap, which means they won't go up over a specific amount in a given period of time. Some ARMs can't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which ensures that your payment can't increase beyond a fixed amount over the course of a given year. In addition, almost all ARM programs have a "lifetime cap" — this means that your interest rate won't go over the capped percentage.

ARMs usually start out at a very low rate that usually increases as the loan ages. You've probably read about 5/1 or 3/1 ARMs. For these loans, the initial rate is set for three or five years. It then adjusts every year. These kinds of loans are fixed for a number of years (3 or 5), then they adjust after the initial period. These loans are usually best for borrowers who anticipate moving within three or five years. These types of adjustable rate programs most benefit borrowers who plan to move before the initial lock expires.

Most people who choose ARMs do so because they want to take advantage of lower introductory rates and do not plan to stay in the home for any longer than this initial low-rate period. ARMs can be risky in a down market because homeowners can get stuck with increasing rates if they can't sell their home or refinance at the lower property value.

Have questions about mortgage loans? Call us at 978-422-2311. It's our job to answer these questions and many others, so we're happy to help!